ReadyForZero’s Free Service Eases Credit Card Troubles
Y Combinator founder Paul Graham likes to advise entrepreneurs taking part in his startup incubator program to focus on “hair-on-fire” problems—areas where new ideas can take hold faster because people are in urgent need of a solution. In the consumer market, there couldn’t be a much bigger hair-on-fire problem than credit card debt. Households with cards carried an average credit card debt of $15,788 in 2008, according to the most current data available from the Federal Reserve Bank of Boston’s Consumer Payment Research Center. And that debt was mounting at an average annual percentage rate of 14.48 percent, triple the rate of the average mortgage loan.
Young people—no surprise here—are especially bad at managing their cards: 41 percent of adults aged 18 to 29 admitted that they’d made only the minimum payment on a credit card at least once in 2009, according to a survey by the Financial Industry Regulatory Authority. Many don’t understand that if they only pay the minimum amount each month, they’ll waste more on interest and drastically delay the day when they’ll be debt-free.
Non-profit agencies like American Consumer Credit Counseling have long offered credit-card holders advice on debt management, and some even help consumers consolidate high-interest credit debt into lower-interest loans. But signing up for this kind of help is a slow, manual process involving lots of phone calls and paperwork. Rod Ebrahimi and Ignacio Thayer, who took part in the summer 2010 term at Y Combinator, say they wanted to try using the latest Web technologies to automate and speed up the credit management process. And the startup they created to do that—ReadyForZero—is taking the wraps off its free online advisory service today, after a long period of private beta testing.
At ReadyForZero, users simply input their name and address, the last four digits of their social security numbers, and login credentials for their online banking and credit card accounts. Then the startup’s algorithms go to work, pulling in information about debt levels and payment schedules and generating a personalized dashboard that graphically summarizes a user’s debt and his progress paying it off over time.
It’s all designed to equip users to take smart action—for example, by paying off their highest-rate cards first, or perhaps by applying online for a lower-interest personal loan. There’s a Mint-like focus on colorful graphics that help users understand their financial situation, but with a specific lens on resolving credit card debt.
Ebrahimi and Thayer are both programmers by training, but Ebrahimi says they decided to dig into consumer debt management after watching their own friends struggle to pay off credit cards.
“In one week I got two e-mails from totally different parts of my life,” Ebrahimi says. “One was from a guy who was asking 12 of his close friends to pitch in and purchase his credit card debt so that he could pay a lower interest rate. That was light bulb number one. Light bulb number two was when, that same week, my girlfriend came to me. She had finished her PhD and gotten a great job, but her debt was holding her back and she was starting to struggle. That’s how the seed was planted.”
After exiting Y Combinator with a prototype advisory system last August, Ebrahimi and Thayer collected a $260,000 seed round from high-profile individual investors like YouTube co-founder Steve Chen and 500 Startups founder Dave McClure. They’ve been working ever since to refine the service’s interface and build backend connections to all of the financial institutions where they’ll need to grab users’ data. Now it’s ready for the public.
Interestingly, though, ReadyForZero wasn’t the service Ebrahimi and Thayer set out to build when they got to Y Combinator. Ebrahimi says the idea the pair originally pitched to the incubator program had to do with social news aggregation—think Facebook meets Google Reader. They even had a working prototype. Testers liked it, Ebrahimi says, but they didn’t return to it over and over. In other words, they didn’t seem to need it. “We wanted to solve a real problem,” says Ebrahimi. “Once we started looking at it from that angle, it was just a nice toy. It was a lot of fun, but we weren’t really solving anyone’s problem.”
Fortunately, that’s exactly when the two tales of credit-card woe showed up in Ebrahimi’s inbox, giving the team a clearer problem to work on. “Because we have people in our age and demographic with this problem, it was very clear what their hurdles were,” says Ebrahimi. “We were building a product for ourselves in some ways.”
So far, ReadyForZero is keeping its service fairly simple. There’s a calculator that will predict how long it will take to pay off your credit cards, based on whatever monthly payment you say you can afford. There’s a handy table showing how much you owe on each card, and when the next payment is due. The site also offers advice about which card to pay off first, based on the current interest rate (a critical piece of information that’s often hard to track, Ebrahimi says, since many cards have variable rates that change depending on the consumer’s recent behavior).
“Have just a little visibility empowers people a lot,” Ebrahimi says. “The new Consumer Financial Protection Bureau flew us to Washington recently to demo the product there. There was a lot of interest in just creating tools that create visibility, and once it’s there you are surprised how people’s behaviors change.”
If it’s not charging to create all this visibility, how does ReadyForZero make money? In just one way, so far. If the company’s algorithms think that a user will qualify, they may recommend applying for a fixed-rate loan through Lending Club, the Redwood City, CA-based peer-to-peer lending operation. If the loan goes through, Lending Club pays ReadyForZero a 2 percent finder’s fee.
It’s a sensible partnership: 60 percent of the loans Lending Club makes are to consumers who want to pay off high-interest debt, according to Rob Garcia, the company’s senior director of product strategy and a member of ReadyForZero’s advisory board. The startup could send Lending Club more business by giving consumers the confidence to apply for debt-consolidation loans, while also saving Lending Club’s time by screening out consumers who aren’t likely to qualify. “This team is onto something disruptive,” Garcia said in a statement.
Over time, Ebrahimi says, ReadyForZero hopes to develop two other revenue sources. One would be selling a new kind of credit report—one far more detailed than what Experian and other credit-reporting agencies offer. “The magic will be that as we can see more and more of the history of your paydown, we may be able to say that you have had starts and stops here or there, but actually you are pretty credit-worthy,” he says. “We can create a report, and you can use that however you want.”
The other possibility—and one that sounds much bigger to me—is that credit card companies could hire ReadyForZero to help their own customers pay off their debts. Right now, if an account holder gets into financial trouble and can’t pay off his card, the card issuer will wait for 180 days, then sell the account to a collections agency, usually at a huge discount (the agencies pay just $12 to $20 for every $100 of debt). “There is no in between,” says Ebrahimi. “You fall off the cliff, and you’re screwed.”
But with the data it will collect on its users, ReadyForZero could eventually step in as an intermediary, protecting card holders from collections agencies while at the same time helping card issuers identify the least troubled customers and get more of their money back. “This type of tool could basically automate the process for credit card companies to help you pay back your debt in a more reasonable way,” says Ebrahimi. “So they don’t lose the whole spread between $12 and $100, and you get to feel you are actually paying back your debt.” Which is a lot better than having your hair on fire.
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