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

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.