We created SimplyCredit because we were tired of credit card companies’ approach of 'paying billions in fine is easier than doing the right thing'.
To fight credit card companies, you need to understand why their product has been very sticky -- for example, attractive rewards programs incentivizes spend and gimmicky terms keep people in debt for a very long time. Most consumers are not good with managing their finances so handing cash over to them (in the form of personal loans) to manage their credit card debt does not work -- most of their paid-off cards start accruing balances shortly thereafter. We wanted to build SimplyCredit so the credit card companies will not even see a single dollar in interest charges.
Happy to answer any questions you guys have. I used to work at FICO for nearly a decade so I would like to think I know a thing or two about the credit card industry.
If you ask me higher rates are justified because consumer's get tricked into it. Take department store cards for example, they charge 25% - 30% because no one thinks they need to carry this balance forward when they are buying a refrigerator -- they just want the 15% off at point of sale and 0% for 6 months is a bonus. Fast forward 6 months, they have not paid it off and the credit card company calculates interest by going back in time as those interests were 'deferred'. Now with all the compounding they end up getting stuck in debt for much longer they needed to be.
For people we give credit to, we focus on consumers with good credit. For others, we will still service them and help them by optimizing their payments and those payments will directly come from their checking account.
Edit: I want to clarify one thing. When I say good credit -- it does not mean you need to have a FICO Score or long history. We look at everyone holistically so it comes to down whether you are a responsible borrower measured across many dimensions.
This looks like marketing a very marginally better product (if at all), with excessive pomp. This is no revolution... its much more like well disguised misleading stuff from financial institutions that we are so much used to.
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[ edited to clarify some points ]
Karthik,
Since you insist on the complete interest being paid at the end of each month, the grand idea of "simple interest" has very little meaning. Hear me out here...
The whole idea of compound interest is to charge interest on the unpaid interest. You are "solving" the compound interest problem by not compounding interest for a month and forcing people to not have unpaid interest at the end of the month. However, the benefits amount to very little. If people are capable of paying off their interest at the end of each month, there is little difference between simple and compound interest.
I find your explanation on simple interest (https://www.simplycreditinc.com/simpleinterest) a bit misleading and self serving.
The difference between simple and compound interest (as stated in your essay) arises only in the long run, and your service does not allow long runs of unpaid interest... which means there can only be very little difference. Its misleading to compare long runs (> 30 days) if you don't allow them. The large savings from simple interest only apply to people who cannot pay the interest for 4 years. But you will kick them out after 2 months of non-payment.
Also, if a person is capable of paying the interest every month, they don't gain anything by signing up with your service... maybe a few cents on 5000$ every month, but that's it. Nothing more.
The positives I really see...
1. Convenience of not worrying about paying different credit cards.
2. Possibly lower interest rate... but I have seen no solid numbers on that on the website.
3. By forcing people to pay off the interest every month, you might make them more financially responsible.
4. I would like to see banking evolve, and this might be a ray of some hope... but I need to see more.
Hi Jugad,
Thanks for the constructive comment. I want to first clarify one thing -- we are not 'claiming' we are revolutionizing the industry by switching to simple interest (it is a pretty big deal though for the industry as you will see in my comment below but that's not a claim we are making) . As you pointed out the biggest value prop of our service is convenience (you get to keep your credit cards -- no change in your day-to-day use) and lower rates (our rates will be 3% to 15% lower than credit card companies for comparable risk rating) and really diverting the revenue from the credit card companies so they will be forced to change their ways. I can write pages about all the ways a credit company screws a consumer but that will take us away from your very balanced comment.
All the current approaches rely on giving people cash in the form of personal loans supposedly to pay down credit card debt. I can tell you from working in this industry for so long that this does not really put a dent on the credit card companies. At least, for now those consumers eventually start using their cards again and get trapped in debt because the credit card companies don't want them to pay more than the minimum payment. This is what's unique about what we are doing:
Normal: Consumer Spends $1000 -> Pays less than full balance -> Incurs interest -> Bank gets paid handsomely
Ours: Consumers spends $1000 -> SimplyCredit Pays the bank $1000 -> Consumers incurs interest at a lower rate -> Bank gets nothing -> We get paid what we believe is a fair amount
The above picture eliminates the vital revenue source from the banks. Now why this is better for the consumer:
* We have no fees (no late fees, no penalties). The credit card terms are practically irrelevant.
* We don't re-price you upwards (credit card companies do this all the time and that's how they start low and increase your rates as you start building balances -- CARD only solves a portion of this problem)
* We really encourage people to pay much more tan the minimum payment. Banks fought so hard for minimum payment warning in CARD that it is only marginally useful now. We don't want to be like them and that's not our goal.
Back to your original point about simple interest:
* You are correct, we can probably do better in characterizing the benefit as no one is going to compounded their balances over 4-years without paying down principal. We will try to come up with additional examples -- we wanted to keep it simple to illustrate the issue of compounding but point taken.
* The benefit will be meaningful when it look at it over the life of the debt. People paying $2 extra per month means they pay $24 / mth. Over 5+ years period they have paid a good chunk in extra interest just because of compound interest.
* That said, do you disagree with our characterization that this is 'unfair' and 'complicated'? If you ever had to pay interest on your card, please take a look at that statement and see if you can figure out how interest was calculated. Don't just read about the average daily balance and daily rate statements, try to calculate it on a piece of paper.
* I also don't quite agree that this change is 'minuscule'. There are a few things to keep in mind:
* First, department store cards defer interest 6 to 12 months and it is getting compounded away for a really long time. They also charge 25-30% interest. You can repeat the math for that period and interest rate and you can tell me whether that difference is meaningful. You will most likely see a 10-20% difference between compound interest and simple interest. For most people here it $100 more is not a big deal may be but that could be one additional payment for someone else.
* Yes we are making people pay their interest each month but why should we compare against ourselves? Shouldn't be comparing it against what the industry does, which wants things compound away without your realizing it?
* If this is so trivial as you said, why isn't ANYONE doing this? Some people who claim 'simple interest' in their marketing but actually compound. They all do personal loans with EMI. Guess what the standard formula for EMI is a compound interest. Just because you get fixed monthly payments does not make it simple interest.
* To answer my own question above: the industry will not do simple interest any time soon and this is why: A typical bank's gross yield is about 11% and with simple interest they will drop down to roughly 10%. That's a 10% drop in revenue. BUT, their ROA is 3% so a 1% drop in revenue without reducing default rates (switching interest rates formulas will not help here) or opex, their profit drops by 33%. You think a bank will willing take 33% hit to their profit? To you it may sound minuscule but these dollars add to a huge amount. This is in turn used against the very same consumers in the form of heavy lobbying. Is this the world we want?
In summary, I appreciate your calling out on the simple interest page. We certainly not using it as a marketing tool as we are indeed trying to fix a system as I explained to you above -- we are giving up huge sources of revenue (fees and the compound interest delta). But this page is important and we will make it better -- we will try to come up with a typical credit card user payment behavior and show the difference.
I would urge you to look beyond the simple interest delta. To you it is not a big difference but to a lender it is and we are making the sacrifice to keep things simple for the consumer. We are eliminating a whole bunch of crap from the terms that trip up consumers along the way.
I wish we are ready to signup 1000s today but alas integration with banking system requires a measured roll out. We will release more and more information over time to show how this is really different for a consumer. If you have additional suggestions, please send it our way. you can guess my email easily.
Thanks for reading this far.
I also find it a little surprising that the 30 day numbers are missing from your simple interest page... that's the single most important time frame, given that its common to everything that we are talking about.
I did some numbers on the 5k outstanding debt. After 30 days, simple and compound interest difference, on 5k debt looks like this...
compound interest total : 5074.50
simple interest total : 5073.97
difference : 0.53
Also, you seem to be putting a lot of emphasis on the evils of minimum payment in your comments... and if the minimum payment is less than the monthly accrued interest, that is EVIL. I hate paying a single cent to the banks in interest, and have had enough money to pay all debts in full every month. So I never felt the need to study the minimum payment booby trap in detail. But if banks are doing that... I hope you succeed in derailing them.
Good luck convincing people to be financially responsible, while other banks are inviting them to be irresponsible.
I think building a story around "avoiding the minimum payment booby trap" might be useful... but its a complicated story to tell in a way that an average joe with a short attention span can understand.