NEW YORK (MainStreet) — It’s the maddening vicious circle of consumer credit: you need a credit score in order to qualify to get credit. For young adults just starting out, or recent immigrants with solid incomes but no credit files, it can be a barrier to a better life. Perhaps the solution is to do it yourself.
That’s the idea James Garvey, a software engineer, and Bill Butler, well-versed in the alternative credit industry, have developed in their Denver-based startup SelfLender.
Under-banked individuals, college students and “thin” credit file consumers can build – or repair – their credit scores with a loan to themselves.
SelfLender offers small loans with terms up to 12 months. While you make monthly payments, the proceeds of the loan are held in escrow. When the loan is paid off, the money is yours. Meanwhile, the company says your positive payment history is generally reflected on your credit report within 60 days from your first payment.
Garvey and Butler aim to help one million consumers save $250 billion in fees and interest over their lifetime. Garvey does the math: "The average person saves $250,000 in fees and interest if they go from not having a credit score to having a 'prime' credit score." He says a “prime” credit score is 700 or better.
Monthly payments can be drafted from a bank account, or if a customer doesn't have one, they can be made in person at 7-11 and Family Dollar stores through a service called “Pay Near Me.”
The concept of a loan you can’t have until it’s paid off may sound more like an automatic savings account that doesn't pay interest. But besides building your credit score, Butler says there is a major distinction between the two.
"Unlike a savings account, this is a real financial obligation -- a real debt," he says. The site just went live last week, and within days, Butler says nearly 1,000 users have signed up. He claims the service has already proven popular with not only those without a credit history, but with consumers that have had credit problems in the past.
"A large subset of the population has no other options," he says. "SelfLender is the only choice they have."
Though the loans carry no interest or fees, SelfLender charges a $3 monthly subscription fee, which Butler says only covers the company’s basic overhead. The real profit opportunity for the company is built into their results.
"If we can help somebody that has gone from not having a credit score to having a credit score, they now have the ability to access mainstream financial products," Butler says. "So somebody might come to SelfLender today and not have a credit score, but in six months, it's very possible they could have one and because of that they're now eligible for different products."
SelfLender is counting on those happy customers -- with credit scores -- to remain loyal to their service, perhaps taking the proceeds from their self-lended loan to use as a down payment on a car note or other financial service, offered by affiliate companies through the SelfLender site.
When establishing an account to begin the loan process, SelfLender doesn't check your credit -- that could actually lower the credit score for consumers who already have a credit file.
"That really falls back on our belief that our service should be accessible to everyone," Butler adds. That means regardless of your past credit history, or if you don't have a credit history at all or have had defaults -- whatever, the service is available to you. And of course, the fact of the matter is, the proceeds are being held until the loan is paid off, so what's the risk?
Taking out a loan can ding your credit, too -- adding to the debt ratio that creditors consider when reviewing a credit file: how much you owe compared to how much you make. Garvey and Butler have considered that, too.
For consumers with no credit history, SelfLender recommends beginning with only a small loan until consumers build a payment track record. For those who are working to improve their credit score, adding debt might not be as big of a concern as improving their payment history.
For consumers looking to conquer the credit conundrum of it takes credit to build credit, the loan-to-yourself service might be a good option.
--Written by Hal M. Bundrick for MainStreet