Solving the New-to-Credit Problem

The U.S. financial system is a walled garden. Those included enjoy a myriad of benefits—from advice and investments to low-cost loans. Those excluded face a much different reality, where even the most simple financial task can require substantial cost and inconvenience. But rather than providing a paved pathway into the system, too many of today’s mainstream financial services providers require that people on the outside endure the financial equivalent of scaling a 20-foot wall.

Despite the fact that credit cards have become critical for making day to day purchases in this day and age, credit card ownership among consumers aged 18-25 declined steeply after the 2008 financial crisis. Today, the average credit score among consumers below the age of 35 is 665, well below the national average of 701. In addition, there are over 10 million adults under the age of 25 that have not yet started building their credit, and millions more will enter this category every year as more of Gen-Z become credit-eligible.

So what’s going on?
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The myth of building credit

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The problem appears to have to do with supply, rather than demand. In 2009, the CARD Act all but shut down the student credit card market, making it much harder for young people to qualify for an introductory credit card. A brief search on Credit Karma shows the top credit cards for people new-to-credit are relatively expensive—with multiple fees, high APRs, and little access to credit. Some “credit building” credit cards require a 100% cash security deposit, still charge 28%+ APRs, and offer no rewards! If you’re one of the tens of millions seeking to build your credit without a financial guarantor or co-signer, these are some of your options. As is often noted, it “takes credit to build credit”, and earning the kind of credit score that qualifies you for a credit card with rewards or low APRs can take years.

Credit scores create the financial equivalent of “guilty until proven innocent.” You’re high-risk and subprime until you prove to be creditworthy.

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The perverse result of this is that most financially inexperienced consumers must begin their financial lives with introductory credit products that are hazardous, expensive, and limiting. 

This is a status quo we’ve been trained to accept. But it doesn’t have to be this way.

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A new path
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Thousands of additional data points are available to prove the creditworthiness of new-to-credit consumers, even without credit history. We can use modern technology and financial data that already exists to give people access to a credit product that’s appropriate for their financial situation from day one.

At Petal, we set out to use technology to expand access to credit and give people the tools they need to build credit responsibly, so they can start their financial lives off on the right foot. The results are beginning to speak for themselves.

There are now more than 50,000 Petal cardmembers, and in 2019, our user-base has doubled every two months on average! But what’s surprising, beyond the growth, is who Petal customers are and how they’re using the card.  

A stunning 66% of Petal members are either Gen Z or Millennials (31% Gen Z and 35% Millennial), and the most common age of a Petal cardmember is 20 years old. But young people are not just gaining access to credit, they’re gaining access to safe, responsible and low-cost credit as compared to alternative options.

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We designed the Petal card experience to help users financially succeed and learn to use credit responsibly. This includes providing Petal cardmembers with tools to help them budget, and added transparency into the cost of borrowing money before they carry a balance. The data shows it’s working: When it’s time to pay their bill, the percentage of Petal members who pay equal to or more than their statement balance each month is 24% higher than the industry average. That's an extremely positive habit.

Today, we’re excited and humbled to share that we’ve entered into a $300 million debt facility with Jefferies, the global investment bank. The Jefferies’ variable funding note will support the continued exponential growth of the Petal card on our mission to make credit honest, simple and accessible.

We couldn’t be more excited about the next stage of the journey. We’re looking forward to expanding the availability of the Petal card and building new ways to improve Petal members’ financial lives.

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The Petal credit card is issued by WebBank, Member FDIC.