Despite advances in banking and personal finance technology, paying credit card bills in a simple, time-efficient way is still a pain point for many consumers. According to recent research, 37% of U.S. households revolved credit card debt from month to month last year.
Now, loan startup Upstart and Cross River Bank are adding automation to the process through a direct credit card payoff feature they debuted last month. With the new feature, Upstart steps in and pays the card provider through a personal loan, taking the burden off the consumer.
“We wanted to do something that could potentially nudge the consumer to what’s best for them,” said Dave Girouard, co-founder and CEO of Upstart. “There’s pretty clear evidence that when loan proceeds go to pay off credit cards, the loans perform better.”
As a growing number of consumers rely on personal loans, the 8-year-old Upstart is streamlining the process for its customers. The loans, which are funded by the New Jersey-based Cross River Bank, present less risk to Upstart because the debt paid off automatically.
Alyson Clarke, principal analyst at Forrester Research, pointed out that Upstart paying the credit card debt itself won’t improve consumer repayment behavior. According to Clarke, most consumers with credit card debt fall into two categories: those with an expensive one-time bill such as a medical expense, and those who overspend.
According to Girouard, the majority of Upstart’s loans are used to pay off credit card debt. Upstart considers employment history, education, cost of living and credit reporting data when underwriting its loans, so it already knows how much credit card debt a customer is carrying. When customers apply for a loan, Upstart asks consumers if they would like Upstart to pay off the credit cards. If they accept, customers pay back Upstart through an installment loan.
Upstart acts as a front-end underwriting and customer–acquisition business, but the loans are funded by bank partners. The only bank partner funding the direct credit card payoff feature is Cross River Bank, but Girouard said Upstart hopes to add more bank partners later this year.
Loan terms are set by the bank partners, but they start with APRs as low as 3%, and the highest rate Upstart allows is 35.99%, with terms lasting three or five years. With the direct credit card pay off, Cross River offers a 100–basis point — or 1% — reduction on the loan APRs.
“It’s easier for the consumer, and it’s less effort,” Girouard said. “On the bank side, you’re getting a customer who is doing the right thing financially.”
Bank Innovation Ignite, which will take place March 2-3 in Seattle, is a must-attend industry event for professionals overseeing financial technologies, product experiences and services. This is an exclusive, invitation-only event for executives eager to learn about the latest innovations. Request your invitation.