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Startup Aims to Help Millennials Build Credit

[Saturday, December 19th, 2015]

For young people, establishing a credit history can be tricky. It may feel a bit like a Catch-22, where you need to have a credit history in order to borrow money, but you can’t establish that history without borrowing money first.

A new startup company aims to fix that, letting young adults apply for loans even if they don’t have any credit history, with the specific intent of building that history and establishing a credit score.

Called Backed, the startup is a digital lending platform that is now accepting applications in New York, New Jersey, and Florida. They have secured $1.5 million in angel investment funds. “Most existing lenders don’t have the capacity to properly estimate the default risk of Millennials,” said the company’s co-founder, George Popescu. He said that more than 86% of Millennials are declined for a loan or are overcharged when they do get one.

Backed works by allowing young people to use their parents’ credit scores as collateral, effectively letting them “borrow” their folks’ good credit.

The Boomerang Generation

Millennials who move back home after moving out for college or a job have been dubbed “the Boomerang Generation” by the media, and that demographic has grown from 22% to 26% over the last five years, according to data from the Pew Research Center. Sixty-three percent of Millennials don’t have a major credit card, which definitely affects their ability to establish credit and to do many financial things.

A credit card is a necessary financial tool these days, and not having one keeps young folks from having great credit, using credit card rewards, and being able to take advantage of 0% APR financing on purchases, among other things.

Cosigners vs. backers

The difference between having a parent simply co-sign on a loan and using the Backed service is that when someone co-signs, they only are called on if the loan is in default. Backed lets cosigners know right away when any payment is late or otherwise insufficient. That way, parents know sooner when their child is possibly getting in over his or her head.

When cosigners are notified that a loan is in default, they will then be faced with fees, penalties, and interest to cover. Backed keeps that from happening—or at least, it aims to. When a parent or other cosigner is notified of a shortfall, there is a 15-day grace period in which no one’s credit score will be negatively affected, allowing them to resolve the issue without repercussions.

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