Tomo Credit is rethinking credit scores for the next generation

When Kristy Kim attended UC Berkeley, she couldn’t be approved for a credit card. Like many students, she had had no luck getting a credit score — that sometimes elusive number whose higher value guarantees credit card approval. and other vital necessities, such as house rentals and business start-up loans. Generally, young people without credit cannot be approved for a first bank card without a co-signing parent; many students, including poorer students and international students, may not have this privilege.

Having moved to America from South Korea, Kim was also aware that this was an issue massively affecting immigrants, even though she was only 11 when she immigrated. Without the ability to accumulate credit, even older immigrants, who may have had strong financial practices abroad, find that whatever measure used in their home country is worthless in the American system and that they must to start over.

Kristy Kim [Photo: Tomo Credit]

In order to create a more inclusive system and better equip those previously excluded from economic opportunity, Kim founded Tomo Credit, a fintech company that allows people with no credit score to apply for a credit card and get the usual perks, like cashback benefits, while building up their credit on an accelerated schedule. The company’s goal is to help customers stay financially healthy and not fall prey to overspending, which can happen when dealing with traditional card issuers who charge high interest and late charge.

Credit scores haven’t always been a thing. The FICO score, as a type of credit score is called, was devised in 1956 by an entrepreneur and a mathematician who wanted to create a national standard. But one new study estimates that 21 million American consumers are “invisible credit”, having no credit history: 40% of those under 25 and 65% of 18 and 19 year olds are invisible, according to the study. She also found a minority and socioeconomic bias: 30% of low-income people are invisible, as are 27% of blacks (compared to 16% of whites), and most undocumented immigrants. In one blog post On the study, Experian, one of the three major credit bureaus in the United States, noted that “being labeled as invisible credit can hinder participation in the financial system and prevent people from accessing socio-economic opportunities that come with it”.

Gig and remote workers in the modern economy, whose financial habits are more varied than in the past, may also struggle with credit. For all of these groups, trying to build financial health becomes a vicious cycle: without a credit score, you can’t get a credit card and create a score, which you need to then access essentials like student loans. private, utilities and internet, car insurance and mobile phone contracts. “It’s not an immigrant or expatriate problem anymore,” Kim says. “This is a problem for the new generation of consumers.”

It is this new generation that Tomo Credit, which issues credit cards to those without a credit score, is trying to target. Instead of looking at credit scores, the startup relies on the financial data young people already have: savings in bank accounts, even international accounts, as well as assets in stock wallets and crypto wallets. . While young people may not be credit savvy, due to a dire lack of financial literacy education, they can be knowledgeable about Coinbase and RobinHood. Tomo’s underwriting algorithm assesses any combination of these assets, as well as cash flow trends – what is transferred in and out of a bank account – and generates a personalized credit limit between $100 and $30,000 (the latter is also the average credit limit among Americans). “It’s not black and white, because our goal is to understand you holistically,” Kim says. “Instead of just giving you a random, vanilla credit limit.”

Although Tomo does not purchase assets from credit bureaus, it does pass data to them, allowing clients to begin building credit over time. That’s Tomo’s goal, whereas traditional card companies, Kim says, encourage overspending, so that they can collect late fees and interest. “Customers’ credit ratings are none of their business,” she says. “They do not care.” On the contrary, their “buy now, pay later” model “encourages[s] you to buy another Platoon. Instead of issuing monthly payments, Tomo bills customers weekly on an automatic payment system, resulting in more frequent reporting to credit bureaus.

Chi Chi Wu, an attorney at the National Consumer Law Center, a nonprofit that focuses on market justice and other consumer credit issues, says she was surprised by this weekly payment schedule because that “credit reports are done on a monthly basis”. Kim counters that the three bureaus — Equifax, Experian and TransUnion — seem to be dealing on different schedules. “We report weekly, and some credit bureaus track and consume faster than others,” she says. (In its experience, Equifax was the fastest.) Tomo also doesn’t charge late fees or interest; instead, if a user hasn’t paid after a week, the card temporarily deactivates. On average, she reports that customers see their credit score increase by 100 points within 6 months of using Tomo as their primary credit card.

Tomo isn’t the only option for accessing cards with no credit history. Wu mentions that traditional banks are starting to “venture” into inclusive options to make more people “credit visible”, like launch pilots to use alternative approval data such as cash flow. Major lenders also provide secure credit cards, which are secured by a large cash deposit from the cardholder. The downside is that upfront guarantee, and, says Kim, these cards are often stingy with credit limits, sometimes just based on your deposit; In addition, they can include high application fees and interest.

So far, Tomo has processed around 1.5 million requests, Kim says; it hasn’t built enough customer data yet to offer car loans or mortgages, but it will come with more data. Right now, the startup is focused on creating an environment where young customers can thrive. With the rise of open banking, Kim recognizes that competitors will arise and she would be happy to see them help the industry change. Its real competitors, she says, are legacy lenders. “We want to eventually make credit scores obsolete.”

This post has been updated with new figures from Experian.

Dora W. Clawson