A startup called Maxamum Inc. is trying to break down the credit system’s long-standing Catch 22–consumers generally cannot establish a credit history without having a credit card, but they typically cannot get a credit card without a credit history.
Maxamum offers a service that reports, for a fee, consumers’ payment activity on bills, including rent, electric and cable, to MicroBilt Corp.’s alternative credit bureau, PRBC, originally known as Pay Rent, Build Credit. As an added incentive, Maxamum offers a credit card-style rewards program for consumers who exhibit good credit behavior, such as paying their bills on time.
Maxamum’s service is not cheap. Its monthly fees range from $25 to $75 depending on the level of membership,
Overall, credit experts are skeptical of the service, questioning its ability to effectively give consumers without a credit background a boost. Their doubts underscore the fact that nontraditional data are still not widely used in lender underwriting models, and it may be some time before they are. As such, many believe secured credit cards are a better option to build credit.
“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,” says 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?”
Ben Duncan, Maxamum co-founder and president, says the value of his company’s service is in its ability to streamline a complicated process for loan applicants that do not have a detailed credit history.
“If you walked into a bank and you wanted a loan and they say 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 adds. “What we tell people is we eliminate the shoebox.”
Maxamum send customers’ bill-payment data to PRBC, which verifies the accuracy of the data. MicroBilt is the exclusive licensee of the FICO Expansion score, which was created in 2004 to help businesses assess the risk of the estimated 50 million to 70 million consumers with little or no credit histories. Since then, an estimated 10 million consumers have been scored with the FICO Expansion score.
Nearly 800 lenders 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 such things as rent, electricity, cable and cell phones. The major hurdles to getting such information have been a lack of robust, verified data and a slowness among both lenders and the credit industry to change their ways.
The major credit bureaus shy away from allowing consumers to self-report bill-payment activity because it is difficult to verify. Having the utilities or third-party companies report directly to the bureaus helps relieve some of that concern. However, many states do not allow utilities to share customer information. Another issue is that many more companies do not have adequate technology to report the data to the bureaus.
There is a realization among industry participants that a broader swath of information needs to be included in the underwriting decisioning process so consumers with little or no credit histories have access to more banking products. Many of these consumers are creditworthy and, therefore, are potentially profitable customers, experts contend.
“Most of the analytics and scoring in the industry is getting a second look right now,” says 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,” says Arjan Schutte, managing partner of Core Innovation Capital I LP, a venture capital firm focused on investing in technology companies catering to underbanked consumers. “That is starting to slowly change.”
For its part, Experian PLC has made progress in incorporating rental data. In June, the credit bureau bought a company called RentBureau, a credit-reporting agency focused on the multiresidential industry. At the time of its purchase, RentBureau had accumulated data on 8 million residents from numerous property-management companies. Experian has since loaded millions of rental-history reports into its system, and the bureau just recently began to include rental data as an additional line of information on an individual’s credit report.
Experian also is working to get more 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 the data in the consumer’s credit report.
Equifax Inc. says it collects a variety of credit, financial, employment and public record data from various sources, including financial institutions and government entities, but declined to provide any further details.
It is only a matter of time before the practice of bill-payment reporting is commonplace, Maxamum’s Duncan contends. About 40 consumers are signed up for Maxamum’s service, which officially launched last month.
Maxamum offers three levels of service. For $25 per month, the company will report payment activity on one recurring bill and the regular payment for the service. For $49.95 per month, Maxamum will report the activity for two bills and its service, and for $74.95, three bills and its service. The higher the 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 says. 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. They can redeem points 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 argues that a service such as 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 the cards carry annual fees and high interest rates on revolving balances. The payment information typically is 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 says. “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 believes secured cards generally are 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,” he says.
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, Duncan says.
With a card, “you’re not being credited positively for what you’ve been doing for years,” he says. “If [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 acknowledges that Maxamum’s service could be seen as pricey, but he says it is less expensive for consumers over the long run because it will help them get access to less expensive forms of credit.
“What we tell people 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,’” Duncan says.
