How to Prove You’re More Than Your Credit Score

It’s often impossible for people with low credit ratings to access capital. This start-up has an innovative way to change that.

National Journal
May 28, 2014, 6:04 a.m.

Last fall, at a con­fer­ence in New York City, Za­y­doon Mu­nir stood in front of an audi­ence of po­ten­tial in­vestors and made a pretty big claim. “We have cracked the code on how to make fin­an­cial edu­ca­tion work,” he said.

Mu­nir didn’t mean that his start-up, called Re­volu­tion­Cred­it, has found a way to make the av­er­age Amer­ic­an more know­ledge­able about fin­an­cial ba­sics like budget­ing, in­fla­tion, and in­terest rates. In­stead, his com­pany’s on­line courses ac­com­plish something else: They help lenders identi­fy con­scien­tious bor­row­ers, and give cus­tom­ers a chance to prove they’re sav­vi­er than their cred­it scores might sug­gest.

“One can think of Re­volu­tion­Cred­it as a way to add bo­nus points to your cred­it score,” Mu­nir says.

Cred­it-rat­ing agen­cies cal­cu­late scores based on how someone has already in­ter­ac­ted with the fin­an­cial sys­tem. Scores typ­ic­ally range from 300 to 800, and a high num­ber sig­nals to lenders that the bor­row­er can be coun­ted on to pay her bills on time. Per­son­al cred­it scores are a ma­jor factor in wheth­er lenders de­cide to give someone a loan, cred­it card, or oth­er cred­it product — and at what in­terest rate.

The sys­tem doesn’t work well for young people, re­cent im­mig­rants, and low-in­come in­di­vidu­als who don’t have lots of ex­per­i­ence with bank loans. About 64 mil­lion people in the U.S. have either a very lim­ited cred­it his­tory or no his­tory at all, ac­cord­ing to the Na­tion­al Con­sumer Law Cen­ter. It can be dif­fi­cult for lenders to dif­fer­en­ti­ate among people with mid­dling scores, and know­ing someone’s past his­tory doesn’t tell a lender wheth­er that per­son is com­mit­ted to good fin­an­cial be­ha­vi­or in the fu­ture.

“Grow­ing up in Ir­aq, we didn’t have cred­it cards,” Mu­nir says. When he came to the U.S. to go to col­lege, he had to fig­ure out how to man­age a card by us­ing his ex­per­i­ence — learn­ing about fees, late pay­ments, and in­terest on the fly. Mu­nir once worked at Ex­peri­an, a cred­it-rat­ing agency, and he has spent a lot of time mulling over bor­row­ing be­ha­vi­or and what kinds of data might help meas­ure someone’s cred­it-wor­thi­ness

Those thoughts be­came a busi­ness idea when, a few years ago, he was pulled over for tex­ting and driv­ing. “As I’m pulling over, in my mind I star­ted say­ing, ‘I’m go­ing to traffic school, be­cause I don’t want the points on my li­cense, I don’t want my in­sur­ance to go up. I’m much more re­spons­ible than the stu­pid mis­take I just made,’ ” Mu­nir says. Edu­ca­tion, he real­ized, was the key: if a re­medi­al driv­ing class can help people prove they’re good drivers, why couldn’t fin­an­cial-edu­ca­tion classes help people show they’re good bor­row­ers?

Re­volu­tion­Cred­it was foun­ded in 2012. The start-up has cre­ated a series of one-minute videos on fin­an­cial ba­sics, such as why it’s im­port­ant to set aside sav­ings in an emer­gency fund. Learn­ing is tested through in­ter­act­ive puzzles and quizzes. The course ma­ter­i­al isn’t any­thing new, but it’s de­livered at the mo­ment when cus­tom­ers are most likely to be pay­ing at­ten­tion.

Say a cus­tom­er is ap­ply­ing for a cred­it card. Her bank might in­vite her to par­ti­cip­ate in a spe­cial of­fer: She’ll get a bet­ter deal if she passes an on­line course, de­signed to take 10-15 minutes of her time. If she com­pletes the course, and gets a good score, that tells the lender that she’s will­ing to take time out of her day to get a bet­ter rate, and to learn how to bet­ter man­age her money. Re­volu­tion­Cred­it will also work with com­pan­ies to design courses aligned to their products, such as a course on us­ing a cred­it card.

The cus­tom­er, mean­while, gets ac­cess to a lower price or even a product up­grade. “No mat­ter what, this con­sumer is go­ing to get something bet­ter than if Re­volu­tion­Cred­it didn’t ex­ist,” Mu­nir says. “We’re a pos­it­ive-based data com­pany. Hav­ing us adds value; not hav­ing us doesn’t de­tract.”

Early res­ults are prom­ising. Ac­cord­ing to the com­pany, people who take the courses are 30 per­cent (or more) less likely to fall be­hind on their pay­ments com­pared with a con­trol group. That fig­ure in­cludes people with bad cred­it scores.

The courses can be used by com­pan­ies bey­ond tra­di­tion­al banks, Mu­nir says, in­clud­ing sub­scrip­tion ser­vices — such as Dir­ecTV — that take someone’s cred­it-wor­thi­ness in­to ac­count. The concept could even be ad­ap­ted for sub­scrip­tion ser­vices that just want to fig­ure out which cus­tom­ers are most en­gaged. Mu­nir won’t dis­close the amount of money Re­volu­tion­Cred­it has raised so far, but the com­pany has passed the earli­est stage of ven­ture cap­it­al fund­ing and is now work­ing with about six cli­ents.

The com­pany isn’t go­ing to solve the prob­lem of fin­an­cial il­lit­er­acy in the United States. But it might give some people im­port­ant in­form­a­tion right at the mo­ment they need it. And by col­lect­ing ad­di­tion­al, ac­cur­ate data, it might help make lenders a little more will­ing to ex­pand ac­cess to their cap­it­al for po­ten­tial home­buy­ers or en­tre­pren­eurs. 

“When I think about what Re­volu­tion­Cred­it is try­ing to do, I think it’s less about this idea that — oh, if they’ve taken a quiz it means that they’re smarter, and they’re go­ing to per­form bet­ter. In my mind it’s a vouch for char­ac­ter,” says Jen­nifer Tes­cher, pres­id­ent and CEO of the Cen­ter for Fin­an­cial Ser­vices In­clu­sion, a think tank.

If you’re a bank, you want to cre­ate a lifelong re­la­tion­ship with up­wardly-mo­bile bor­row­ers — re­gard­less of how lim­ited their cred­it score might be or the mis­takes they’ve made in the past. More re­search is needed to prove that passing the courses really does sig­nal someone’s will­ing­ness to ad­opt good money habits. But if the ini­tial find­ings hold, ser­vices like Re­volu­tion­Cred­it this could open up more eco­nom­ic op­por­tun­ity to a wider pop­u­la­tion of Amer­ic­ans.

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