Funny (Matt Levine) piece about credit building:

https://www.bloomberg.com/opinion/articles/2021-12-16/the-se...

Credit building

This one is not a new SEC proposal, this one is just fun.

If you are a young person with no credit history, or a person with bad credit history, you will want to “build your credit.” This consists basically of creating a long record of reliably repaying your debts, so that credit reporting bureaus think you are a good credit, so that banks will happily lend you money, so that you can buy stuff on credit cards and get leases and mortgages and car loans. If you have no or bad credit this is hard, though, since no one will advance you any credit, so you won’t have any debts to pay, so you won’t build credit.

There are canonical approaches. Banks will give you credit cards with low credit limits so you can start small and build from there. Or they will give you secured credit cards: You put $1,000 in a bank account, you get a linked credit card with a $1,000 limit, the credit advanced to you is secured by the money in your account, the bank takes no credit risk but reports repayments to the credit bureaus, etc.

What if there was a simpler way? Yesterday reader Sark Asadourian sent me a link to a Credit Building product from Canadian fintech Koho, and I haven’t stopped laughing about it since. Here is the “How it works” section of the website:

1 Start by subscribing to Credit Building for $7/month in-app

2 Sit back. We'll report your progress to a major credit bureau and help you grow your credit score in just 6 months — without having to lift a finger

3 Ensure there’s $7 in your Spendable account each month to cover the subscription fee. That’s it!

They will demonstrate to a credit bureau that you pay your bills, by sending you a $7 bill each month, which you will pay. What is the bill for? For demonstrating that you pay your bills. They’ll charge you $7 a month for charging you $7 a month. What you get for the $7 is a record that you paid $7. Which could conceivably be worth $7 to you! Possibly this is good for the customers! I cannot stop laughing. This is maybe the best financial product I have ever seen.[13] “For the low cost of $7 a month, you can pay us $7 a month.” Everything else is so dull and overelaborated. Imagine being the person who came up with this. Imagine the bright wild gleam in your eye, coming in to work that day to tell your colleagues.

Also though imagine messing this up. You’re a young person, money is tight, you sign up for Credit Building, you pay them $7 a month for a few months but then life gets complicated, your account balance gets below $7 and you miss a payment. Do they report that to a credit bureau? Does it hurt your credit? Oh you’d better believe it:

Just as making your payments on time will positively impact your credit score, the inverse is true. Not making your payments on time will hurt your credit score.

To keep it simple: We advise you to let KOHO do all the work after you register. Just ensure there is $7 in your Spendable balance for the subscription fee each month and you won’t miss a payment!

Seems harsh!

[13] Exercise for the reader: What do you think are the margins on this product? My guess is “surprisingly low, depending on how you count.”