Maxamum Inc. has a novel answer to a long-standing lending paradox.
The startup's service is designed for consumers who can't get a credit card because they have little or no credit history, but can't build a credit history because they don't have a credit card. To make its clients more viable prospects for lenders, Maxamum reports their payment activity on recurring bills, including rent, electric and cable, to MicroBilt Corp.'s alternative credit bureau, PRBC.
The service isn't cheap. Monthly fees range from $25 to $75 depending on the level of membership. Ben Duncan, a Maxamum co-founder and the Salt Lake City company's president, said the service is valuable because it streamlines a complicated process.
"If you walked into a bank and you wanted a loan and they said you didn't have enough credit background, and you walked into that bank with a shoebox full of receipts, they'd have to consider those receipts," he said. "We eliminate the shoebox."
Credit experts were skeptical that the service can do much to aid consumers without credit backgrounds. Their doubts underscore the fact that nontraditional data still is not widely used in lender underwriting models, and it may be some time before that changes.
"I've been highly suspect of companies that describe their service as reporting data to alternative credit bureaus, simply because the ultimate value to the consumer is a bit speculative at best," said Philip Philliou, a partner with the consulting firm Philliou Selwanes Partners LLC in New York. "The big question is do the banks care about their score for the purposes of using it in their decisioning for a consumer credit card?"
PRBC verifies the accuracy of the data it receives from Maxamum. The bureau's parent, MicroBilt, is the exclusive licensee of the FICO Expansion score, which Fair Isaac Corp. created in 2004 to help businesses assess the risk of an estimated 50 million to 70 million consumers with little or no credit histories. Since then, about 10 million consumers have been scored with the FICO Expansion score.
Nearly 800 lenders currently use the score, including "buy here, pay here" auto dealers, local furniture stores, jewelers, landlords, community banks and credit unions.
But for the most part, conventional credit reports track only a consumer's payment history on lines of credit, not recurring monthly bills for things like rent, electricity, cable and cellphones. The major hurdles to getting such information have been a lack of robust, verified data and a slowness among lenders to change their ways.
The major credit bureaus balk at letting consumers self-report bill-payment activity, because it is difficult to verify. Having the utilities or third-party companies report directly to the bureaus eases some of that concern, but many states do not let utilities share customer information. Another issue is that many more companies don't have adequate technology to report the data to the bureaus.
Industry participants realize that broader information needs to be included in the underwriting decisioning process so that consumers with little or no credit histories have access to more banking products. Many of these consumers, experts argue, are creditworthy, and therefore potentially profitable, customers.
"Most of the analytics and scoring in the industry is getting a second look right now," said Christine Pratt, a senior analyst at Aite Group LLC. "Because let's face it, over the past four or five years the track record hasn't been that great."
The major bureaus have made some inroads with including alternative data in traditional credit reports and their scoring models.
"What's been lacking has been the density of the data," said Arjan Schutte, managing partner of Core Innovation Capital I LP, a venture capital firm focused on investing in technology companies that cater to underbanked consumers. "That is starting to slowly change."
Experian PLC, for its part, has made progress in incorporating rental data. In June the credit bureau bought RentBureau, a credit reporting agency focused on the multiresidential industry. At the time of its sale to Experian, RentBureau had accumulated data from numerous property management companies on 8 million residents. Experian has since loaded millions of rental history reports into its system, and the bureau recently began to include rental data as an additional line of information on an individual's credit report.
Experian is also getting a greater amount of rich data from public utilities. A number of utilities report payment information to Experian, though the company would not say how many.
TransUnion LLC, meanwhile, encourages utilities to report payment data, and when the information on a particular consumer is available it includes that in the consumer's credit report. Equifax Inc. said it collects credit, financial, employment and public-record data from various sources, including financial institutions and government entities. It would not provide further details.
Duncan said it is only a matter of time before the practice of bill-payment reporting is common. About 40 people are signed up for Maxamum's service, which was officially launched in November.
As an added incentive, Maxamum offers a credit-card-style rewards program for consumers who exhibit good credit behaviors like paying their bills on time.
Maxamum offers three levels of service. For $25 a month it will report payment activity on one recurring bill, as well as the regular payment for the service. For $49.95 a month it will report the activity for two bills and its service, and for $74.95, three bills and its service.
The higher level of service, the more rewards points consumers can earn each time they pay their bills.
There are other ways to rack up rewards points, Duncan said. For example, a customer can earn 100 points for referring a friend to the service and 25 points every month for subscribing to Maxamum's e-newsletter. Points can be redeemed for electronics, clothing, handbags and even steaks. Customers can also choose to have their points redeemed as cash, which is put toward a bill payment.
Some argued that a service like Maxamum's may not be as effective as existing credit-building alternatives for underbanked consumers, such as secured credit cards.
With a secured credit card consumers pledge a deposit as collateral and receive a line of credit equal to the deposit amount. Often these cards carry annual fees and high interest rates on revolving balances. The payment information is typically reported to the big three credit bureaus, which major lenders use for credit information.
"I believe that the better solution lies in secured card products," Philliou said. "Secured cards provide cardholders with a legitimate extension of credit and enable those cardholders to 'grow' into taking on greater credit exposure. Through a secured credit product, cardholders can reasonably and acceptably enter mainstream financial services."
Philliou also said he believes secured cards are generally less expensive than other services that purport to help consumers build credit.
"I tend to think that [with] a secured card product from a large issuer, you could find good value there, and [it is] not necessarily costly," Philliou said.
Duncan said the appeal of Maxamum over secured cards is that consumers can build their credit without taking on debt and get rewards for paying their bills on time.
With a card, "you're not being credited positively for what you've been doing for years," he said. "If that [bill-payment activity] could positively help you get a lower interest rate or get a loan you may need or whatever the case is, what would be wrong with that? Absolutely nothing."
Duncan acknowledged that Maxamum's service could be seen as pricey, but he said it is less expensive for consumers over the long run because it will help them get access to more affordable forms of credit in the future than they would have access to before building a strong credit history.
"What we tell people," he said, "is this: You pay for having bad credit. … We do know it is a cost, but the cost in the grand scheme of things is minimal for what you're doing."
