Can subscriptions and everyday payments be used to help build or rebuild a credit score? The Los Angeles-based Grow Credit thinks so.
The service, which launched earlier this month, is one of the slew of new ideas coming from businesses that are angling to help build up credit scores for folks who can’t (or won’t) get a credit card, or who are rebuilding their credit.
The company is the latest evolution of a credit-based approach to financial services from the LA-based serial entrepreneur, Joe Bayen.
Bayen’s last startup was Lenny, a credit monitoring and lending service that was aimed at helping people better manage their payments to avoid damaging their credit scores.
Bayen scrapped the Lenny business model after realizing that he’d have a hard time finding a debt financing partner. So Bayen resolved to be more of a sourcing partner for new customers rather than developing a credit and lending business himself.
Hatch Bank, the new business arm for Firstrust Bank, is acting as the lender of record for Grow Credit’s secured Mastercard credit business.
Bayen has always been focused on helping the under-banked make better decisions, and in-between Grow Credit and Lenny there was still another business model that Bayen wanted to try.
It would have been a platform called LennyBike, which would have been a subscription service for customers to get access to a bicycle for $30 a month, and those payments would then count toward building credit.
However, it’s a much simpler proposition to get people to use their existing subscription services as a credit-building device than trying to get folks to pay for something new… thus, Grow Credit was born. (It also didn’t help that Bird raised $300 million and Lime another $250 million around the time that Lenny Bike was trying to get to market.)
The company uses a virtual Mastercard that allows for consumers to pay for online subscriptions only. “We have been able to transform a healthy, positive habit, which is making subscription payments, and we have turned that into a credit-building opportunity,” says Bayen.
It’s a pretty elegant way to solve a problem that’s a real barrier to entry for a large number of financial services. Credit scores can impact mortgages, the ability to receive small business loans and a host of other services that are ways to boost economic opportunity.
The company has even brought on board experienced executives like Nick Roberts, the former chief marketing officer of Acorns, to help get their messaging out.
There are two main competitors to a service like Grow Credit in the market for providing opportunities to build up a credit score, Roberts says. One is forced savings programs, the other is using fixed-limit credit cards with massive fees. A host of new services that would use reporting utility, rental, mobile phone payments and other monthly expenditures toward credit scoring have yet to gain traction.
Grow Credit offers 0% APR financing for its service, but has two tiers. A free tier for an unlimited $25 revolving credit line and a subscription service that charges $4.99 for a 12-month service offering periodic credit limit increases of up to $300. Both the free and subscription versions offer free FICO scores and automatic subscription detection.
The company makes money by giving subscription services the chance to upsell customers using the credit lines. ClassPass has already signed on as a partner, according to Bayen.
“This is establishing a small dollar loan and a line of credit,” says Roberts. “People on debit cards and stored value cards that are out there… they’re using debit cards so the money is immediately debited from their account. What we’re doing is paying the bill and establishing the line of credit and getting paid back at the end of the month.”
The idea of using more data sources and alternative data to how credit bureaus determine credit scores is one that’s already resonating with a few Democratic contenders for the presidential nomination.
Senator Kamala Harris has called for amending the Fair Credit Reporting Act to require credit agencies to include rent payments, cellphone bills and things like utility payments in their credit score calculations.
Roughly 26 million people are invisible to credit ratings and another 19 million have files that are unscorable, according to the Consumer Financial Protection Bureau . These are people who lack enough bank or credit-union accounts to have a credit score — and they’re a group that’s more likely to include African American and Latinx consumers.
Roughly 15% of African American and Latinx consumers are unable to receive a credit rating, according to data from the Consumer Financial Protection Bureau, as cited by MarketWatch.
“Expanding the calculation of credit scores to include payments made on rent, phone bills, and other utilities will increase access to credit for those with a limited or ‘invisible’ credit history or poor credit scores,” according to the Harris website.