Building credit is a difficult, mysterious and potentially hazardous endeavor, particularly for those who are new to credit. They can easily make a mistake and damage their thin credit file.
According to a TransUnion study, 45 million American adults have little to no credit history. One of those was my 19-year-old daughter.
I naively thought that she would ace the challenge of getting her first credit card because she had three advantages. First, she followed the advice of her father, who spent 16 years as an executive at a megabank, with much of that time focused on improving customer financial health. Second, she is not only a loyal customer with a healthy savings balance but also part of a household deemed “premier” by her bank. Finally, she is a college student, which makes her likely to earn an above-average lifetime income.
Three declined applications later, I understood all too well that she and I, as her advisor, were not up to the challenge. What follows is a description of our journey and my recommendations on what credit card issuers should do to improve their marketing, application and decline experiences. After all, most people new to credit do not have an industry insider guiding them. If we struggled, imagine how other students, young adults, and immigrants that comprise the new-to-credit segment stumble through the first card gauntlet.
One Student’s First Credit Card Application
Our tale starts with research before my daughter’s freshman year at college. We had simple criteria. Find an unsecured, no-annual-fee card designed for students or people building credit.
We started with our family’s bank, where our household has a long tenure with nine products and premier status. The megabank did not have a student card. However, I identified a card the bank offers that met our criteria and seemed targeted at people with a low credit score. She applied online, proud to declare her healthy summer job income.
She was declined. She cried.
I cannot fault her emotions. The letter declining her application for a credit card was cold and intimidating. Shockingly, the letter provided no resources — neither educational content nor coaching — to help her strengthen her credit.
I was astonished that she was declined. Her application was strong, with an income well above expenses, not to mention the strength of our household bank relationship. With all the hype around big data, I incorrectly assumed the bank would use its sophisticated models to conclude that she represented an acceptable risk for a low-limit card.
I was also upset. My supposedly wise counsel had led to the failed application with its hard credit inquiry, which weakened her credit strength.
Try, Try Again (and Another Head-Scratching Megabank Move)
Undeterred, we applied for a credit card offered by a competing megabank that seemed even more targeted at people working to establish credit.
She was declined again. I panicked.
We searched for any card for which she could qualify. We explored all card types — unsecured, those with monthly fees, and cards issued by quirky firms. We even spent hours at third-party review sites such as NerdWallet.
Her third application was successful. A few days before she headed off to college, my daughter placed her credit card into her wallet. It sported a $39 yearly fee, a humble $400 credit limit, and a 19% interest rate.
The saga, however, does not end there.
After one year of dutifully paying her monthly statement in full and earning a credit limit increase to $800, she received an intriguing direct mail offer from our family’s megabank. She was encouraged to apply for a no-fee credit card with a healthy 1.5% rewards rate for every dollar charged to the card.
I encouraged her to apply. After all, her thin credit file had been transformed into a solid credit history. I assumed that the megabank would only send such an offer to the household of a long-time, loyal, premier customer if the probability of approval were high.
Alas, I was wrong. She was declined yet again. Her yearlong disciplined credit-building behavior would be marred with another wasted hard credit inquiry. To add insult to injury, a second copy of the same direct-mail piece offering this credit card arrived the day after the letter declining her application.
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How the Banking Industry Can Better Serve New-to-Credit Consumers
1. Provide more credit-building guidance.
While most financial firms have some credit-building advice, it is lacking. Moreover, it’s rarely offered when people want this advice, such as when their credit application is denied. Most guidance consists of long articles buried on one or two web pages.
To transform their credit-building guidance, firms need to make it:
• Easy to find — The guidance should have some visibility in multiple places, including on the same digital pages as the credit card marketing and, in the biggest no-brainer ever, on the letter telling applicants they’ve been declined.
• Personalized — Building a good credit history is a multi-step, multi-year journey. The guidance needs to break that journey down into bite-sized steps so that it doesn’t overwhelm the person receiving the advice.
• Empathetic and understandable — Multiple studies show that financial guidance is more likely to be followed when it is empathetic and jargon-free. Lenders should hire or partner with experienced financial counselors to craft the guidance. Those who have been in the trenches advising consumers know what works.
• Available in multiple languages — Given that the consumer segment with little or no credit history includes many immigrants, the guidance should be available in multiple languages. Financial concepts are hard enough without adding language complexity.
• Multimedia and multichannel — People have different learning styles and respond to different media. Therefore, credit-building guidance should be delivered in a variety of ways, not solely in written articles. Use videos, virtual financial coaches powered by artificial intelligence, and even bank staff and call center agents.
This is not as difficult and expensive as it may sound. AI-powered customer engagement technology makes delivering this type of personalized multichannel guidance effective and affordable. GreenPath Financial Wellness, a nonprofit focused on financial counseling, has a virtual financial coach that provides a proof point.
According to GreenPath Chief Development Officer Rick Bialobrzeski, nearly 40% of the people who have used the virtual coach report an increase in confidence that they can improve their credit score. For those who need the human touch, best-of-breed knowledge management solutions can guide bankers to deliver the empathetic, personalized and compliant advice that customers crave.
2. Create better credit-builder products.
Every credit card issuer should have a product that helps customers build credit. The cards should provide easy credit score access, be chockablock with advice (statement messages, emails, links to AI-powered coaches, etc.) and include incentives to reward credit-building behavior (for example, give cardholders rewards for on-time payment streaks).
3. Refrain from aggressive solicitations to thin file consumers.
Financial firms know when someone has a thin credit file — a credit report makes it obvious. Therefore, credit card issuers should stop sending tantalizing offers to these customers unless they almost certainly will approve the application. Think about the damage that a decline will have on both the credit score and psyche of the consumer working hard to build a strong credit record.
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New-to-Credit Consumers Are ‘Good Risks’ for Credit Card Issuers
Credit cards are the first product opened by most new-to-credit borrowers, both in the U.S. and elsewhere.
A TransUnion study of these customers suggests that they tend to be careful to make timely payments on their first cards to preserve ongoing access to credit. They generally performed well compared to more established borrowers with similar credit risk profiles.
“New-to-credit consumers are often good risks who are hungry for credit and will show loyalty to those financial institutions that offer them their first credit accounts,” Charlie Wise, head of global research at TransUnion and co-author of the study, says of the findings.
I can proudly report that my daughter’s credit score is currently at an all-time high. She has built a strong credit score backed by a healthy history, positioning her for access to ample lower-cost credit. If financial firms implement the recommendations laid out above, more people will achieve similar results, creating a bigger pool of profitable, loyal, financially healthy customers.
About the author:
Evan Siegel is the vice president of financial services at eGain, which has been providing customer engagement solutions globally for more than 25 years.