‘FIs and lenders have begun to recognize the inequities in the system’: Credit building services are on the rise

The newfound interest from consumers could be fuelling an incentive for financial service providers to add more credit building services.

According to Robin Saks Frankel, credit cards and personal finance writer for Forbes Advisor, these types of products give financial institutions access to millions of people who may otherwise remain invisible to the system.

“Financial institutions and alternative lenders have begun to recognize these inequities in the financial system. They see that there’s an opportunity to provide a credit-building product to the millions of consumers who have little to no credit and thus don’t have access to certain types of wealth-building opportunities, like home ownership,” said Saks Frankel.

A couple of years ago, credit bureau Experian added Experian Boost to its tools -- a product that allows customers to actively submit their utility data to build their credit profiles. Recently, Experian announced that since Boost’s launch, 60% of people using the tool have seen their score go up, including 85% of thin-file consumers.

Last month, Wells Fargo, U.S. Bancorp and JP Morgan Chase announced plans to launch a collective pilot program that will take into account data from users’ savings and checking accounts to increase their chances of getting a credit card, even if there isn’t any credit history. 

On the fintech side of things, last year Chime released its Credit Builder card. With a secured credit card, users choose the amount they want to transfer to their Credit Builder account and that becomes the amount they are allowed to spend on their card. The firm then reports user payment history to the credit bureaus, helping people build their credit profiles.

“Americans have embraced debit cards for greater spending control but this limits their ability to establish or build their credit score,” said Kendra Boccelli, director of corporate communications at Chime. “We created Credit Builder to help our members stay in control and safely build their credit with everyday purchases.”

Varo, meanwhile, announced its own secured credit card earlier this year, called Varo Believe. When users spend with the card, Varo will automatically put money aside into special vaults so that they can pay the credit card bill on time later. And then this payment history is communicated to the credit bureaus, which is meant to improve the credit score over time. Like Chime, the amount users can spend depends on how much they deposit into their account.

“[The card] enables you to build your credit as you spend, while we report all of your payments to the major credit bureaus,” said John Doppke, head of lending at Varo.

Consumers’ increased interest in building their credit may not be the only thing that’s driving growth in credit building services. There’s also the new data that’s available, which could make it easier for companies to take into account other factors when measuring consumers’ credit worthiness -- even if they don’t have any traditional credit history to go by.

“There's a lot more alternative data available in terms of things like cell phones and rental payments,” said Tom Giancola, credit expert at Mercury Financial, a fintech credit card company.

Another reason could have to do with Gen Z and millennials’ increased curiosity and interest around the topic. 85% of Gen Zers say learning about personal finance is a priority for them. 63% say they feel anxious about their finances, according to research by Tallo, a software company that connects students with employment opportunities.

“We’re seeing large new generations of people -- for a while it was millennials, but now it’s really Gen Z -- who may be a little bit skeptical of credit, but know they need to dip their toe,” said Varo’s Doppke.

According to Doppke, an additional reason for the increase of credit building products is the increased awareness and discourse surrounding financial inclusion.

“You're seeing more and more focus on helping people build their credit for the first time or repair credit if they’ve had trouble in the past,” said Doppke.

But for now, new ways of measuring credit are still in beta form, so to speak. According to Matt Harris, CEO of Bloom Credit, a lot of these companies still haven't figured out a way to scale the coverage and reporting of their new credit measurements. 

“You see some companies attempt to launch alternative credit scores in the United States,”  said Harris at Tearsheet's DataDay conference last month. “But the reason why these end up falling flat on their faces is because they’re never going to get the reporting structure necessary to actually be able to get the data they need.”

According to Harris, companies and consumers both end up being at risk. Consumers risk unfair damage to their credit scores, whereas companies risk missing cases of fraudulent disputes. 

Then there’s the case of financial literacy, which has also been getting increased attention in the industry. The thing about a lot of credit building products is that while they may improve credit, they don’t necessarily improve knowledge about credit.

According to Ben Reynolds, CEO of Sure Dividend, an investment research firm, a lot of these products can be a great way to build credit, but can also encourage passiveness when it comes to credit, leading people right back into the trap of ‘spend first, think later.’

“These can be beneficial for those beginning to build or improve their credit score, but it’s also not reliable in helping people handle regular credit cards. It could have drastic consequences for those who get a credit card soon after since they might forget they can’t rely on only spending what they manually put on their card or having the automatic payments held for them,” he said.