Soon That Couch on Layaway Could Boost Your Credit Score

Future Green Dot products may include a credit-building layaway plan

A family shops for new furniture.
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Old-school retail layaway plans may be getting a reboot soon, potentially bringing credit scores up while consumers save up to make a big purchase.

Green Dot president and CEO Dan Henry said he’d like to introduce a layaway plan in 2023 that would allow consumers to save up for purchases and build their credit history at the same time. Green Dot provides financial services such as prepaid debit cards and money processing to consumers and businesses. Layaway is just one idea the company has on its product roadmap, which Henry revealed during a conversation with The Balance about financial inclusion and how Green Dot is trying to meet the needs of unbanked and “credit invisible” consumers.

Key Takeaways

  • Green Dot CEO Dan Henry said his company could introduce in 2023 a layaway plan that would share payment details with credit bureaus.
  • Under the layaway and payment-reporting scheme, consumers without access to traditional credit could build credit histories and scores.
  • The prepaid debit card provider’s CEO said he is skeptical of ‘financial literacy’ projects and instead prefers to 'nudge' consumers toward making better financial decisions with incentives built into financial products and services.

Green Dot may work with retail partners to make the layaway idea happen. The service would work much like credit builder loans in that consumers would make monthly deposits into a savings account that would be reported to credit bureaus as loan payments. At the end of a fixed period, such as 12 months, they’d have enough money to make a particular purchase, and if they’ve made timely payments, they’d have an improved credit score to boot.

Traditional layaway plans do not report payments to credit bureaus, so those plans don’t build your credit score. Henry sees the credit-building layaway plan as an alternative to buy-now-pay-later (BNPL) services—point-of-sale loans that have come under increasing scrutiny as growing numbers of users miss payments. “I'd like to launch this first and say to our customers, ‘Save money right now, build your credit score, and when you have the money in the bank, then make the purchase,’ " he told The Balance.

About 28 million people have little or no credit history. Many are part of Green Dot’s core market, which is comprised of an estimated 100 million people who earn low to moderate income (around $43,000 a year or less) and live paycheck to paycheck, with expenses taking up most or all of their monthly income. They also include roughly 7 million people who live in a household without a traditional bank account, who are considered unbanked. “Traditional financial institutions are not designed to serve consumers living paycheck to paycheck,” said Henry. "Access should not be a privilege.”

Green Dot’s products include one-time and reloadable prepaid cards, a mobile banking account called GO2Bank, and secured credit cards. GO2Bank requires no minimum balance and the company doesn’t screen applicants with ChexSystems (the banking equivalent of a credit bureau), which might disqualify some applicants who have, for instance, a history of making overdrafts.

Although Green Dot is a bank, it has no physical branches; instead, it partners with retailers such as Walmart, Walgreens, 7-Eleven, and Dollar General. Together, its partners provide 90,000 outlets where customers can buy or reload Green Dot products—that’s more than the number of bank branches in the U.S. Customers can also access their accounts online and through mobile apps.

A number of other online banks and financial technology firms are vying for the same market. Newer companies such as Chime and Varo also provide low- or no-fee banking services and debit cards aimed at consumers with no traditional bank account or bad credit histories. And companies such as Netspend and American Express provide reloadable prepaid cards that are alternatives to traditional bank accounts or credit cards.

Not Budging on Card Fees

Access comes at a cost, though.

One criticism of prepaid cards is that while they allow people without bank accounts or credit cards to use a secure card for payments, they are packed with fees. For instance, with the Green Dot prepaid Visa card, you’ll pay up to $5.95 to reload; $3 to withdraw money through a bank teller or ATM (plus whatever fee the ATM operator charges); $5.95 for 12 paper checks; and $7.95 as a monthly fee (waived if you’ve deposited $1,000 or more in the previous month on the card). These fees are higher than the Amex Serve’s fees but in line with Netspend’s equivalent prepaid card. Henry said the company has no intention of lowering them.

He said the monthly fee covers the company’s costs if a user leaves a few dollars on the card and forgets about it. Say the customer loads $100 and spends $95 of it, he suggested. “If we didn’t have that fee, we’d have to be carrying an account with a $5 balance on it for about 15 years before we could then mark it as an escheatment and then have to go try to find that customer,” Henry said. They then would have to prove to regulators the person couldn’t be found, then hand the case over to the state where the customer was registered. “The cost to have to chase down those nickels and dimes becomes untenable.”

Using Nudges, Not Lectures

Henry said he gets irked by the financial literacy movement. He said most low-to-moderate income consumers—the ones who use his products anyway—don’t need to read articles that preach about saving money. Instead, his company tries to give them products that are designed to encourage beneficial behavior and make it easy.

One such nudge is a feature of the GO2Bank account that lets customers who receive direct-deposit payments access the money as soon as the deposit lands. They don’t have to wait for the payment to clear. The service is intended to be an alternative to payday loans— small-dollar short-term loans borrowers often use to tide them over until they get paid. Payday lenders charge fees that amount to triple-digit APRs, and the loans can trap consumers in a cycle of debt.

Although competitors such as Chime and Netspend also offer early paycheck access, and third-party apps such as Earnin and Dave supply paycheck advances, Henry said his firm pioneered the “Get paid faster” line and idea. GO2Bank lets you access employer paychecks up to two days early, and unlike many competitors, makes government benefits payments available up to four days early. “All the stimulus payments that came around last year, all of our customers got stimulus payments four days before everybody else,” he said. “Because as soon as we see that file post, we'll release funds for our customers.”

Credit Building Tools for the Underserved

The current credit scoring system has come under fire because among other things, it focuses on payment history for loans and credit cards—products that may not be available for people who have never had credit or who earn modest salaries.

The credit scoring system was designed to be neutral, but because of historical discrimination, it puts people of color at a particular disadvantage. For instance, decades of redlining made it harder for Black people to own homes and build generational wealth, but mortgage payment history factors into credit scores. A 2020 survey showed that 18% of Black people have no credit score—the highest percentage of any race group.

Green Dot has partnered with credit reporting agency Experian to give banking customers access to a free suite of services to help them build credit. It includes access to a FICO credit score, credit monitoring and identity protection services, and Experian Boost. Boost is a service offered for free through Experian that can get payments for phone, utility, and streaming services added to your credit report.

Overdrafts With ‘Guard Rails’

Many mainstream banks are reducing or eliminating overdraft fees, but Henry said Green Dot has been doing that for years. He said customers view overdrafts as a necessary credit product. A typical overdraft customer might just need to buy a tank of gas to get to work for a day until they get paid the next day. But he’s also seen people get into trouble with overdrafts.

Green Dot has what he calls “consumer-friendly overdraft protection,” which requires users to be on direct deposit and to receive text or email alerts about their balances. The maximum they can overdraft is $200, depending on their direct deposit activity, and as long as they pay back the overdraft within 24 hours, they won’t be charged any fee; if they don’t pay it back, they’ll be charged $15, which is lower than the $35 that was typical in the industry about a year ago. “We put the guardrail in, so you're not going to do $1,000 of overdrafts and wake up and walk away,” Henry said. “You only overdraft knowingly because you know what your balance is. And then we give you a 24-hour grace period to cure the overdraft.”

As it looks to the future, Green Dot is building its own platform for processing payments that will allow it to operate more efficiently. Eventually, Henry envisions the company getting into small-dollar loans that would also have “good guardrails” to keep customers from getting in over their heads. “I hope all of our customers from an income standpoint outgrow our service, and until they do, we'll be there,” he said—although not necessarily for a $50,000 car loan or $300,000 mortgage, he added. “But for eventually, $1,500 to buy a laptop for their child so that they can do remote learning—we can be there for those things.”

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Article Sources

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  5. The Ascent. “Study: Race and Personal Finance in America.”