Many young people in the United States face a common conundrum when entering the job market: It’s difficult to find a job without experience and you can’t get experience without a job.
There’s a similar dynamic at play when it comes to building credit. Millions of young adults don’t have credit histories or scores and may find it difficult to get loans or a line of credit as a result.
The traditional—or at least most popular—solution to helping young people build credit over the years has been for parents to add their children as authorized users to their own lines of credit. While that’s effective to a degree, Texas-based Austin Capital Bank has developed and launched a new credit-building tool to help young people build credit with relatively little risk.
The product, called FreeKick, is available in 48 states for young people between the ages of 14 and 25, and works as a sort of set-it-and-forget-it credit builder. Parents make an initial deposit and the credit-building happens almost automatically from the customer’s point of view.
Erik Beguin, the CEO of Austin Capital Bank, which he founded in 2006, tells Fast Company that there are roughly 15 million young Americans who don’t have credit scores, and about 50 million adults who are otherwise credit-invisible, and that for years, “the only viable answer to solving that was to add them as an authorized user” to a parent’s credit card.” FreeKick, he says, is designed to be an alternative and a simple one.
“I wanted to make this super simple for parents,” he says. “You make a deposit, activate credit building, and we automatically build 12 months of credit [history] for them.”
And as for how it actually works, Beguin says it’s a “special combination of banking accounts.” Effectively, parents open a savings account, make a deposit, and a $600 credit-builder loan is taken out and automatically paid back over the course of a year from the deposited cash. After 12 months, the loan is paid off, the originally deposited amount is back in the account, and a child or young person has a year’s worth of credit history.
“It’s super simple for consumers,” Beguin says. After an initial deposit is made, “we handle the creation of the loan, and 12 months later, your kid comes out with a year’s worth of credit history.”
Alternative for the credit invisible
Though many startups, fintech companies, and financial institutions are finding ways to extend credit to those who are “credit invisible” or otherwise have “thin” credit files—consumers who are often immigrants or those new to the United States—FreeKick is designed specifically to help young people build their credit. Beguin also points to some of the flaws in the authorized-user model, which can be helpful in helping build a young person’s credit in many cases, but can hurt their credit if a parent misses a payment, and can see their credit history wiped out if a parent removes them as an authorized user.
With those flaws in mind, Beguin says his goal was to develop and bring to market an alternative that offered a low lift for parents.
FreeKick is free to parents who make an initial deposit of at least $2,500. For those depositing $1,750 or $1,000, there’s an annual fee of $49 and $99, respectively, that applies. The only other caveat Beguin says parents should be aware of is that minors using FreeKick to build their credit will need to leave their account open until they turn 18.
FreeKick is relatively new to the market, but Beguin says that early feedback has been positive, and is helping spur conversations about the importance of credit and finance between parents and their children. “We’re building healthy credit habits and credit histories before they actually need it, as well as the habits needed to maintain it,” he says, adding that he hopes it will pay off in a big way for millions of young people.
“What I’d really love to do is help these 50 million Americans build and understand credit,” he says. “A good credit score can save an adult $200,000 over their lifetime.”
This story was updated to clarify that a statistic about the number of credit-invisible Americans referred to all adults, not just young adults as an earlier version implied.
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