Building A Better On-Ramp For Credit Repair

Self Lender Founder James Garvey never thought he would go into financial services, and certainly never thought financial inclusion would become a personal passion. As a software engineer by training, his area of expertise was online direct marketing.

Then he decided to go to Argentina with his wife for a few months for their honeymoon, and got a crash course in crashing his credit. He had attempted to set his credit card payments on autopay while he was away, which would have eliminated stress if he’d done it right. But he didn’t. And after he went late on a few months’ bills, his credit score took a hit.

At that moment, Garvey learned something important about himself: Despite being in his 30s, he knew nothing about the credit rating system. He didn’t even know what his score was, until he inadvertently subtracted nearly 100 points from it. And then he learned a second lesson: Rebuilding one’s credit can be a massive challenge.

“I was trying to understand how this credit really worked, you know, how does it actually work in the U.S. I’m not from a financial services background, so I just started digging in, doing research, and the more I read, the more I realized that I know nothing about payments or credit bureaus or anything, and that’s when I discovered it hurt so many people that either don’t have a credit score or are below credit score,” he noted in a podcast interview.

The damage he had done, he noted, wasn’t impossible to undo. But as he quickly learned, the options for those with a bad (or no) credit history were quite a bit narrower. Secured credit cards tended to lead the pack for people looking for an onramp into the credit system, he found, but secured cards have two big problems. The first is coming up with the money. Low-income workers need access to credit, too, he noted, but coming up with $300 to $500 for a deposit on the card can pose a real hardship to someone who lives paycheck to paycheck. Plus, Garvey said, if the customer needs access to those funds, the card has to close.

Credit unions offered a similar solution, allowing customers to deposit $500 and then borrow back the same amount to pay off over time to rebuild credit. The customer gets the cash back in hand at that point, he noted, but the upfront cost remains a problem.

Self Lender builds off that idea, Garvey said, but drops the requirement that the consumer come up with the money upfront. Instead, the consumer is encouraged to save and work on fixing their credit at the same time.

“So the idea for Self Lender was, what if I could partner with a bank and basically make you a loan where you have to put the money into a brand-new CD,” he described.

The customer pays on the loan for 12 months, depending on the agreed-upon installment term, at roughly 10 percent to 12 percent interest. At the end of the 12-month term, the funds come out of the CD and the consumer gets their $500 (plus the tenth of a percent of interest the funds have earned). Self Lender does not do the actual underwriting, but acts as the intermediary between the consumer and the bank partners, matchmaking the deal and then servicing the loan thereafter.

It wasn’t an easy sale at first – most banks thought the idea sounded more nutty than promising, but Garvey found a single bank in Austin that was willing to work with Self Lender to build out the product. He packed up his wife and worldly goods and set out for Texas.

“So once you get your first bank partner, it’s a lot easier to get the second and third and fourth and so on, but the first one was extremely tough. In our case, there’s no capital at risk here, but you do have operational risk, strategic risk, compliance risk, reputational risk – you know, it keeps going on and on,” he said.

As he noted, the product has proven popular, particularly among consumers looking to rebuild their credit. While some fraction of their customer base is thin-file, about 70 percent of their customers are under the age of 35 and looking to rebuild credit that has taken a hit. Women also seem to dominate the platform (comprising 70 percent of their users), and Self Lender is also particularly popular among African American and Latino users. These customers, Garvey noted, often have what appear to be subprime scores, but “not subprime mindsets.”

People who come to Self Lender aren’t looking for access to quick funds, Garvey pointed out. The “loan” they take out won’t be available to them until they pay it off in full in a year. Instead, these customers are looking to “build credit and save money” – and they take that effort very seriously.

Unlike most subprime lenders that see defaults in the 25 percent range, Self Lender’s delinquency rate is between 6 and 7 percent. The improvements to credit score are a little harder to track, because so much depends on what else is in that report and how well the customers pay other bills – but on average, they tend to see about a 45-point increase throughout the year.

What’s next for the firm? Garvey said their next challenge is figuring out how to continue their relationships with their customers after that first loan. By the end of this year, they are looking to offer a secured card product of their own, so their customers (as they pay down their loans) can store some of that equity on a card they can use to participate in the digital economy.

More broadly, Self Lender’s goal is to transition their customers from their secured credit-building loans to unsecured credit products – though that move is likely still a few years away.

For now, Garvey said, Self Lender aims to provide customers who are ready to work hard to improve their credit scores with a pair of bootstraps for free, instead of charging $500 or more as the price of improvement.