Debitize Wants to Help Millennials Build Credit without Accumulating Debt
If you have self-restraint, the benefits of keeping a credit card (or three) in your wallet are great. With cards offering $1,000 sign up bonuses, 5% cash back, and sundry other spending rewards, you can really make credit cards work for you financially.
However, if you’re the slightly more impulsive type of individual, a little hasty with your spending and not particularly good at managing your personal finances, credit cards can be a very slippery slope. Interest mounts up pretty quickly, and if you start missing payment dates, you’re in debt and you’re in trouble.
The Millennial Aversion to Debt
The millennial generation is well-known to have grown into an aversion of accumulating debt. Americans under 35 years of age are less likely to have a credit card than any other demographic. In fact, according to an analysis by The New York Times, data from the Federal Reserve indicates that the percentage of this cohort who hold credit card debt has fallen to its lowest level since 1989.
And who can blame them? This is the generation that came of age during the financial crisis, who witnessed first-hand their parents and/or their friends’ parents struggle through the horrors of too much debt. It really is no wonder, then, that a Money Under 30 survey revealed that today’s 20-somethings are three times as likely to make purchases with a debit card or cash than use a credit card.
(Image source: moneyunder30.com)
“It’s pretty clear that young people are not interested in becoming indebted in the way that their parents are or were,” said David Robertson, publisher of The Nilson Report, a newsletter that tracks the payment industry.
Sticking with cash and debit cards may seem like the safest and most prudent route to take for many young adults. But of course, the complete avoidance of credit cards comes with costs of its own. For one thing, debit card usage doesn’t get reported to credit bureaus (and cash spending is completely anonymous), which means that without a credit card it’s practically impossible to build credit. So what happens a few years down the line when these cautious millennials want to try and get a mortgage?
It’s also pretty difficult to rent a car without a credit card. And then there are all those credit card rewards – often worth hundreds of dollars – that are being missed out on each year. Put simply, no matter what the reasons are for not wanting to use credit cards, those that don’t are making life difficult for themselves in the long run and leaving big bucks on the table.
This is where new startup Debitize comes in. Founded in 2014 (launched 2016), Debitize is a breakthrough personal finance management tool that helps millennials build credit without using credit. Sounds impossible, right? Well, essentially it is – but the Debitize solution allows users to treat their credit cards as if they were debit cards, and then use Debitize to pay off their balances before they accrue interest, which means that they build credit without accumulating debt.
Here’s how it works. Debitize users sign-up to the platform and link their checking account with any credit cards they want to use. Then, as they make purchases with their credit cards, Debitize moves the money out of their checking account and into the Debitize account. At the end of the week, Debitize automatically pays the credit card bill. For those that are worried about overdrawing their checking accounts, users simply set up a minimum balance to be held, and Debitize will never draw beyond that minimum amount.
“We want to help people use credit responsibly, so they can get their rewards and build good credit,” said Liran Amrany, Debitize’s CEO, “but we also want to help them stay out of debt, and avoid late or missed payments. Debitize gives you the discipline of a debit card, while still taking advantage of the perks of a credit card.”
The beauty for millennials and other people worried about sliding down the slippery, debt-ridden credit card slope is that Debitize minimizes the irresponsibility of overspending with a credit card. Debitize alerts users immediately when they are running low on funds in their checking account, warning them to go easy with the credit card. It also eliminates the need to have to remember to track payments, due dates, and pay credit card bills – automation that is highly-prized amongst millennials.
Building Credit with Credit Optimizer
Debitize has recently upgraded the service through the launch of its Credit Optimizer functionality. With this process, Debitize seeks to pay down users’ credit cards each month before the statement closes to a target of 1% utilization. Amrany, wrote to Bank Innovation about this new feature:
“The 2 largest components of your credit score are payment history (35%) and utilization (30%). Debitize already helps with your payment history by making sure your bills are paid on time, and Credit Optimizer will target your utilization by automating payments to your credit card right before your bank reports it to the credit agencies. Basically we will pay you down to 1% of your credit line so your utilization always looks like it’s 1%. We ran the likely impact through some users with high utilization on Credit Karma’s Credit Simulator tool, and it was an improvement of more than 70 points.”
Automating Good Financial Habits
Helping millennials manage their finances whilst at the same time building their credit scores is Debitize’s ultimate raison d'être. $3 million worth of credit card debt has already been paid off with Debitize. But, although the tool is just a tool, and can’t prevent reckless credit card spending in itself, it nonetheless presents an automated way to help people take control of their spending and manage their credit cards wisely. And, according to Amrany, this is just the start. The last word goes to him:
“Our ultimate goal is to automate good financial habits. We’re starting with credit cards, but we also want to expand beyond that. Eventually, you’ll be able to use Debitize to pay not just your credit card, but your mortgage, your loans — all of your expenses.”
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