Fintech startup wants to grant credit newbies easier access to credit

Inside Subprime: September 27, 2017

By Caroline Thompson

In today’s world, you need credit for pretty much everything. From buying a car to applying for an apartment, if your credit score is less than satisfactory, you might just be out of luck. These things can be difficult enough for people with bad credit to sort out, but those with no credit at all are often at an even deeper disadvantage. While you might think that lenders, landlords and banks would be scrambling to snatch up someone with absolutely no debt to their name, the truth is that credit newbies often find it extremely difficult to gain access to credit without the help of a cosigner, or paying upfront for a secure starter credit card.

This is because lenders don’t like risks. Without a credit report to analyze, there’s no way to determine your ability to pay back potential loans, or to figure out whether you’ll be able to make rent every month. This is a frustrating and often vicious cycle for young people who need credit to further their lives, but can’t find anyone willing to give it to them.

Petal, a new fintech startup based out of New York, wants to change that. This month, they’re launching a new kind of credit card for the underserved consumer. Instead of using traditional credit scores from the three major credit bureaus to assess a potential borrower’s creditworthiness, Petal is using machine learning and has created a new algorithm that analyzes a borrower’s bank account activity.

“For New-to-Credit consumers, credit is sideways,” said Petal CEO and co-founder Jason Gross in a press release earlier this month. “Credit scores are notoriously unreliable and mischaracterize over 65 million Americans, locking them out of the mainstream credit system. These consumers are disproportionately young, immigrant, minority and lower income – and predatory lenders, like payday lenders, have rushed in to fill the gap.”

According to Petal’s data, credit card ownership among 18-29 year-olds has dropped 60 percent in the past ten years.

Petal’s new cards will be VISA cards, which are accepted at nearly every retailer. Their credit limits range from $500 to $10,000, and card membership comes with no fees and interest rates between 17.99 and 24.99 percent. In order to apply for a Petal card, you must provide Petal secure, read-only access to your bank statements. Petal will then verify your income, assess your monthly expenses and spending habits, and decide whether you are, as they call it, an “invisible prime” candidate. Petal defines “invisible prime” as “consumers with no credit scores, but who have all the economic fundamentals of a prime consumer.”

“The generation that came of age during the financial crisis continues to be underserved by the banking industry,” Gross said. “Without new solutions, will be increasingly disadvantaged as a result. Credit access is a critical building block for financial stability and homeownership.”

Want to learn more about building credit and how to avoid falling into a predatory lending trap? Check out these related pages and articles from OppLoans: