Why we invest in credit building fintech solutions

In a nationwide poll conducted by Bankrate at the end of 2020, data revealed how the pandemic increased financial inequality in America, which was already dismal. The poll shows nearly 6 out of 10 Americans don’t have access to emergency funds for unexpected expenses like medical emergencies or home repairs. And, at the end of the day, it’s these financial emergencies that disproportionately impact an individual’s entire life.

6 out of 10 Americans don’t have access to emergency funds for unexpected expenses.

Let’s say a person needs their car to get to their hourly job. They get a flat tire on the way. Assuming they’re  one of the 40% of Americans who can’t handle an unexpected $250 expense, they can’t afford to get a new tire that day.  So they don’t show up for work. They lose their job. One solution people without emergency savings often turn to for immediate financial relief is payday lending, which exacerbates the challenge rather than resolving it. With an average 30% interest rate, a borrower’s paycheck pays off interest on a payday loan rather than principal. Any possible chance a person had to put a little extra aside in a savings account ends up in the predatory hands of payday lenders. Yet, for 6 out of 10 Americans, it is one of the very limited options to fix the tire that will save their job.

Something as small as a punctured tire can throw people into an insidious cycle of high interest, predatory loans, job loss, and debt. However, some equally small things can prevent the descent into this vicious cycle: credit building accounts, rent reporting, and debt restructuring.

You can’t build credit if you can’t access credit.

This is the insidious cycle of assigning high interest rates to the lowest earners in our country. The Catch-22? You can’t build credit if you can’t access credit.  Our investment strategy sits within this paradox: break this Catch-22 by investing in credit building products designed for people with poor credit and debt. We’ve invested in three startups doing just that. 

Individuals can build credit with Self Financial by paying monthly installments into an account where they later get access to the money they paid in. Payments are reported to the credit bureau and the funds go back to the individual (minus small fees) at the end of a 12-or 24-month term. 

Esusu reports rent payments to the credit bureaus. They turned a monthly financial obligation — most people’s largest recurring expense — into a credit building opportunity. 

Resolve helps its clients climb out of debt by negotiating an average 40% reduction of total money owed to creditors, providing access to lower interest rates, and tracking spending and credit. Resolve users get to pay less than they owe while avoiding further damage to their credit.

Our impact thesis is that accessible financial solutions that help to build credit, savings, and a future beyond living paycheck-to-paycheck are critical to individual financial wellbeing while also increasing our nation’s resilience to widespread economic crisis. Our investment thesis is that tens of millions of Americans are desperate for affordable credit building products to help them out of financial vulnerability. Just like how a flat tire can easily send an individual into a financial crisis, we believe there are solutions that can just as easily send people into financial success. 

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About the Author

We are a Washington, D.C.-based family office focused on building and investing in early stage innovative businesses.