Young people who wish to get approved for a credit card often run into a problem: their credit history is so new, or perhaps even nonexistent, that their application is turned down. This leaves them in a tough place, unable to get a credit card because they have no credit, but unable to establish credit without a credit card. It’s a chicken or the egg type of problem – a Catch-22.
But a new company aims to change all that. ZestFinance has just come out with the Zest Automated Machine Learning Platform (ZAML for short), which provides credit underwriting that aims to increase approval rates for folks with thin credit files, such as Millennials and other borrowers without a credit history. The ZAML platform lets potential lenders looks at large amounts of non-traditional credit data, so they have more information with which to make their decision than they would if they relied on traditional credit bureaus and credit analysts such as FICO, Experian, Equifax, or TransUnion.
Douglas Merrill, founder and CEO of ZestFinance, says his company sympathizes with lenders who wish to increase revenues while still managing risk. “The difficulty financial institutions face underwriting Millennials is their limited credit histories – they’re a classic example of thin-file or no-file borrowers,” explains Merrill. “Traditional underwriting works well when evaluating borrowers with long credit histories, but when there is limited data, it can’t differentiate between creditworthy and high-risk applicants. Machine learning fills those gaps by analyzing a vastly broader set of data.”
The role of secured cards
For people with limited credit histories, one solution is to apply for a secured credit card. These cards require applicants to put down a deposit equal to the credit line they are awarded, which is then held as collateral in case the cardholder defaults on their debt.
After some amount of time, secured cards can often be traded in for traditional, unsecured cards. That’s because with a secured card, people build credit history. The secured card issuer reports the borrower’s payment history to major credit bureaus, giving them the chance to beef up their credit file and establish a credit score.
Secured cards are becoming more and more popular among Millennials for this reason. But now ZestFinance may offer another option to help them build credit, as well