Digital bank app Monzo has expanded its credit card offering to aid people with poor credit scores, offering users a pathway to improve their files and lending ability over time.
The Flex Build credit card is already in operation, but a new partnership with charity Fair4All Finance will offer an additional route to improve borrowing potential and access to affordable credit. It is estimated that around 16 million UK adults face barriers to borrowing.
The new pilot scheme is a deposit-backed credit card facility, allowing those with low credit scores to access borrowing capacity in limited amounts, before potentially building those limits over time.
Initially, those who are unable to use the Flex credit facility will be directed to Flex Build. From there, eligible customers will be able to place a small deposit into an account which acts as an intent to borrow and repay on their part.
Depending on the deposit amount, they will then be able to borrow up to £250. Rather than this be a method of increasing amounts available to spend, for people with low credit scores the real benefit comes in borrowing a small amount and then paying it back regularly. Over time, showing this ability to make repayments can have a positive impact on credit files.
Should the consumer do so, they will gain the ability to open up a credit limit up to £500 in time, then potentially progress towards the main Flex credit line.
While Monzo’s Flex Build plan offers the capacity to repay over a set period of months if clients wish, repaying a credit card in full at the end of each month clears the balance without any additional interest charges being added.
For those with low credit scores, that is recommended by most experts as the safest course of action, to avoid mounting charges over time and to prove their repayment reliability.
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Lori Campbell, editor of ethical personal finance site Good With Money, said: “Credit cards can help people build or rebuild a credit record, but only if they are used carefully. The safest approach is to spend small amounts, stay well within the credit limit and pay the balance off in full every month, so you avoid interest and show lenders you can manage repayments.”
Features within the Monzo Flex Build process will look to help protect those customers with low credit history from making additional errors.
The app will show how much interest would be payable over different repayment lengths, and a missed payment – rather than immediately having a negative impact – will see customers have seven days to catch up, using their initial deposit to do so if needed. Additional spending would be prohibited in that time until the deposit is refilled, educating users on the importance of spending within means in the process.
Meanwhile, the deposit itself will earn a 2.75 per cent interest rate, the same as is available in a standard savings account with Monzo.
Fair4All Finance is providing a partial lending guarantee for the scheme. Kate Pender, CEO of Fair4All Finance, said: “The launch of this pilot is an important moment for financial inclusion in the UK as Fair4All Finance and Monzo work together to improve access to affordable credit for those who are often shut out.
“By partnering with Monzo we are able to scale up a product with the potential of serving thousands more people, backed by a robust guarantee structure.”
Monzo’s general manager, Luke Enock, added: “Too many people can’t access affordable credit, leaving them unable to manage essential costs or build the repayment history needed for future borrowing. With Flex Build, we’re introducing a new kind of credit product that helps people build a credit history and progress to mainstream options over time. By partnering with Fair4All Finance, we’re reaching thousands more excluded customers, taking a vital step towards a more inclusive credit system in the UK.”
Adam Butler, public policy manager at StepChange Debt Charity, said: “It’s important to speak to your creditors if you’re struggling to make repayments on credit cards, personal loans or other types of debt. It may seems daunting but they are used to speaking to customers in your situation, and will have support in place, including agreeing a payment plan that works for you.
“If you are in difficulty with debt, taking out further credit may only worsen your financial situation. Getting free and impartial debt advice early can make a real difference, helping to explore your options and get you back on track.”
Ms Campbell added: “The risk is that if credit card balances are left to roll over, credit card borrowing can become expensive very quickly. Anyone taking out a card because they have a poor credit score should check the interest rate and fees carefully, and treat it as a credit-building tool rather than extra spending money.”