Maybe you’re young. Maybe you’re newer to the country. Maybe you’re older and have long paid off your debts. Regardless of the scenario, there’s a good chance you’re lacking credit history and are up against a formidable obstacle: the U.S. credit score system.
But, it’s certainly not game over. Far from it.
There are options for beginning borrowers, such as applying for secured credit cards. And the good news is that your options are only multiplying in a digital age. Rather than rely on credit scores, a number of companies are rethinking underwriting practices to help the millions of Americans who have no credit profile whatsoever obtain loans.
“The world needs financial products that are simpler, more honest and more accessible,” says Jason Gross, co-founder and CEO at Petal.
Easier access to credit for first-timers
Fintech firms, like Petal, Nova Credit, CreditStacks and Deserve, are among those hoping to solve the problem. Most recently, Petal announced the national release of its option for first-time borrowers: a credit card issued by WebBank. Petal will approve you for a line of credit from $500 to $10,000. As of mid-October, Petal’s website is advertising annual percentage rates that range from 14.74 to 25.74 percent.
The startup aims to help people who are trying to get their first credit card get one, so that they can move on to other milestones, like getting a car or a home.
“Building credit is critical to financial success,” Gross says.
Inside the Petal card
Petal bills its product as “a credit card with a conscience.” Among the striking features are one that is missing from its credit card: fees, including late fees and annual fees. “That’s not the kind of company we are,” Gross says.
Petal says it makes money through merchant fees collected when you use your card to buy something and on interest if you carry a balance past the due date.
The Petal card also stands out by connecting to a mobile app that shows you how many dollars it will cost you if you carry a balance past the due date.
For now, the card doesn’t offer rewards. But, Petal will report payments to the three major credit bureaus to help you build credit history.
To get the card will require you to plug your bank data into the application so that Petal’s algorithms can look at your income and bills to help assess your credit risk.
As Gross sees it, this alternative approach allows Petal to extend credit to people that traditional lenders would turn down. You can apply for the credit card on the Petal website. Before applying, be sure to compare other credit cards for people with no credit to make the best decision for you.
There’s a need. But is it safe?
Certainly, the need for more people to get access to credit is there.
“There are millions of people who are locked out of the system,” says Ryan Lichtenwald, a content writer and journalist at Lend Academy and LendIt.
By the Consumer Financial Protection Bureau’s 2010 estimates, there were 26 million consumers in the United States who were credit invisible.
To broaden financial access, crunching consumers’ bank account data to quickly underwrite loans online is an approach that many in the industry are considering, if not already pursuing.
However, only time will tell whether the newer model will work as intended.
“There are a lot of uncertainties,” says Lauren Saunders, associate director at the National Consumer Law Center.
One big question mark includes the privacy and security risk of allowing a third-party app to access your bank account data to get a loan. Say there’s a hack. It could be unclear who’s responsible to fix the problem. Or, maybe questions arise from whether an app is making credit decisions on, say, where you shop.
“I think the concept is sound,” Saunders says. “But we don’t really know how it will play out.”
What’s next for Petal?
Petal, meanwhile, is moving ahead on its goal to help fill the gap in the market.
With its credit card publicly available, Petal is working to onboard customers, expand its team and consider its next ambition.
“Eventually, we want to be able to serve all folks,” Gross says.