Building up your credit history or improving your credit score often presents somewhat of a catch-22 situation. You’ll need to take out some form of credit to do so, such as a loan or credit card, but if your score is too low or your history too chequered, you’ll typically be offered a very bad deal, or no credit at all. In financial services, the cash-poor are always asked to pay the most.
Enter: Pockit, the mobile banking app that provides current account functionality for the U.K.’s “underbanked”. The company has teamed up with financial inclusion fintech Nooli to launch ‘Pockit Loqbox,’ a potentially clever way for people with a poor credit rating to improve their score without taking further credit.
The new credit builder product enables Pockit customers to build their credit history through their Pockit current account by simply setting aside a fixed recurring contribution each month. These contributions are then reported to credit reference agencies as proof of an individual’s ability to maintain a consistent credit commitment over a period of time, sans overpriced credit card or high interest loan. In that sense, this is more akin to regularly saving but in a way that is recorded in your credit file.
Here’s how it works: You first decide how much you want to contribute each month, and purchase a Pockit Loqbox voucher worth 12 times your monthly contribution. There’s also a one-off set-up cost of £9.99. The startup then collects the monthly contributions automatically each month and you effectively pay off your Loqbox. Crucially, payments are reported as loan repayments to the three main U.K. credit reference agencies, and when the year is up, the full amount is returned. If for any reason these payments become unmanageable, you can exit early with no penalties.
In an email exchange, I put it to Pockit founder Virraj Jatania that the product would serve its target customer even better if the fintech startup had found a way to offer it for free, since you are still having to pay to improve your score, albeit not via interest on a loan or other form of credit. Pockit also charges 99p per transaction, so you have to factor in these too. He said that wasn’t possible because there are fixed costs, including involving multiple partners, that can’t be got around completely. However, Jatania makes a strong argument that the product is still good value for those who will benefit from it the most.
“The poverty premium of being unbanked or financially underserved is c.£1,300 per year, and a great deal of this comes from not being able to pay utility bills by direct debit or getting sucked into predatory loans (doorstep lenders, etc.),” he told me. “We believe by providing this product, it will help them save in a huge way on the poverty premium. In fact, we will use the data from the credit builder to help them get fairly priced loans”.
One other issue with a credit builder product like this is that credit scores are a black box: it’s not always clear what will or won’t affect your rating and by how much. This makes it hard to assess if the total cost of taking out a Pockit Loqbox will be worth it once the 12 months is up. “We feel the pricing we are offering is fair and will have a meaningful impact,” counters Jatania. “So much so that we are going to offer customers a money back guarantee if they have not seen their score improve as long as they haven’t defaulted on a loan elsewhere out of our control”.