I don’t know if this would be of use to many people however it’s something I would find useful.
So there are now lots of places charging people to build credit scores up such as lockbox and other apps, however I thought of a solution that would allow people to build credit scores free through monzo.
Monzo would supply credit - in the form of overdrafts, loans, credit cards by locking a designating pot be it a normal pot or savings pot which would cover that credit if someone was unable to pay back the monthly charge.
It would not be used to automatically pay the bill each month however it would be allowed to sit there to build interest, only used if people could not finance the bill.
I have a savings account with monzo and have £5000 in an easy access account.
I apply for a monzo credit card with no credit check up to the sum of £5000 (could be lower but no higher). Monzo would issue the credit and lock that pot for the amount I request and would only unlock once the card had been fully paid off and the account closed. (Could have a sliding proportion where you could access the amount that had been paid off too depends on how complex you want the system to work)
You could even introduce the ability of allowing other monzo users to back the credit in the same way, (parents able to back their children, spouse/spouse even friends)
In turn it works as a normal form of credit and by paying off each month you would build credit.
Interest rates set by monzo so in turn monzo would be able to capitalise on this which would be a stream of income of monzo, benefitting both the bank and the banker.
I don’t I have seen this idea anywhere else I may be wrong however it would allow people with some form of savings and low credit scores to gain access to credit easier.
Why would you want to borrow at a higher rate than your savings are at? Or am I missing something?
I was thinking of a pure point of view of building credit quickly but was also thinking along the lines of I am so used to using interest free cards so haven’t really weighed that factor in, very valid point this would probably be beneficial to very few people wanting to build a credit score for a mortgage, who have savings.
If it tied in with an interest free period for 12/24 months would be more worthwhile
Cheers for the comment you’re not missing anything I was being dozy.
Here’s an idea: Just use a normal credit card and pay it off every month.
And another one: This ‘hack’ is just what has been happening for years, before people were talked into spending time ‘curating’ their credit file.
What your are describing is called a secured credit card and is offered in the UK by a few firms such as Capital One.
Personally, I think Monzo has much bigger issues to address than going after what is a niche market. The fact that its savings pots are held with other banks and not itself also makes this idea harder for it to implement.
Does a bank have a 1:1 ratio for deposits:lending or is it higher? If the ratio is more like 1:1 then I can’t really see how Monzo would make this work at their current stage as a company. If it’s higher then this suggestion is win-win for Monzo and the person building credit (this is only really beneficial to someone who is not able to access other credit).
You have £5000 in the Monzo pot (not external) which is locked for an agreed time-frame. As the customer you are able to spend that money on a “credit card” that you pay off as normal (no interest at first statement) thus building your credit. Monzo can re-loan some/all of that £5000 thus earning interest on that lending or earn the BoE rate on it to offset development cost. Gives Monzo a more stable deposit holding and hopefully the customer will be able to access more conventional credit after the term.
Although this isn’t really aligned with the revenue generation focus of Monzo right now it definitely fits with the ideal of helping customers with their financial lives.
@Sambain016 - Might be worth changing the title to “Secured Credit Card - backed by locked pot” as there would always be some form of credit check involved I’m sure even if the threshold was low.
Cheers for the input that makes more sense and closer how I imagined this idea to work. To be honest I’m fortunate enough now to have a high enough credit rating to be able to bounce my debt from one interest free card to the next usually for a small fee, never had a debt backed card like capital one is mentioned further up as the interest rates tend to be really high with that company. Not checked out that form of credit card yet however.
I think with the BoE rate being so low at the moment if they do decided to go into a negative rate (which I doubt) this wouldn’t be no longer viable but would be at the moment whilst positive is that correct ?
Thought it was a bit of a push of an idea
And thanks for all the replies, there are a few options out there just trying to consolidate my finances into the one place.
Also to add I tried to change the title to Secured Credit Card - backed by locked pot
However I couldn’t find the option to change or edit it on my phone at least.
Pencil icon at the top.
If you do that you’ll have even less need for a Credit Rating, if you think about it.
You’ll also pay more, because you’ll ignore competition, which generally brings prices down.
This is common in the US. The point is to not borrow, but to pay off bill in full each time. However, given that one has put down collateral it means that usually one can get a credit card without the usual affordability / eligibility checks, as the bank has the full limit paid for at all times.
Other companies call it prepaid credit card, i.e. Bunq.
The benefits to the user is that it looks like a credit card when used by airlines, hotels, car rental companies and that there is Section 75 protection.
The benefits to the issuing bank, is that they can literally give these out to anybody who is willing to lock up the credit limit as collateral making it cheap/profitable to operate.
The poster of this suggestion is from the UK, so one would assume that they are wanting this for the UK market which is entirely different from the US.
I know that the poster is from the UK, and that this is requested for the UK market.
What I meant is something like this. Although, this may seem like a strange idea and a confusing novel proposition, it actually is a product that already exists in other markets. Secured credit cards are widely available in the US with pretty much everyone offering those in addition to regular, and reward / premium cards with majority of high street banks offering them as a standard.
This type of card is not common the UK. Instead, in the UK, “credit builder” cards are available with low limit, high APR, little to no rewards or 0% deal periods. But otherwise they are the same as other credit cards - i.e. one can still get into debt with it.
It’s harder to get into persistent debt with a secured card, usually if things go wrong one surrenders the locked pot / secured cash but otherwise is not in debt with that provider.