A Service to Pay Off High-Interest Credit Cards, but a Bad Time to Start

The promise that a new service called Tally makes to people with credit card debt is simple enough: Its app scans a picture of your cards, and you agree to a credit check. Then, let Tally pay off your high-interest cards using a new line of credit with a lower rate.

But Tally’s problem is that it is starting up at the exact moment when a similar lender, Lending Club, is in deep trouble with regulators and the financiers who make its business possible.

Tally could save plenty of people hundreds of dollars in interest and fees a year. But should consumers and others whom the company needs to succeed actually trust it?

First, a question: If car loan rates for people with good credit are often below 5 percent and mortgage rates are below 4 percent, why do consumers generally pay 15 or 20 percent annually to borrow money from credit card issuers?

Experts have a couple of answers. According to Marc Sacher, executive vice president at the Auriemma Consulting Group, that baseline interest rate is not the whole story for consumers with good credit. After all, banks are offering all sorts of zero percent interest teaser rates that last for a year or more, which brings down the effective interest rate. But, he added, those baseline interest rates remain high because of regulations that often make it harder for card companies to raise rates for existing customers.

David Robertson, publisher of the payments industry newsletter The Nilson Report, points to another factor. Overall balances in the card industry fell significantly during the economic downturn and haven’t fully recovered. People are paying off their balances more than they used to. Moreover, card companies are spending a fair bit of money to pay for reward programs to entice and retain people who never carry a balance. So if you are a card issuer in that environment, would you willingly lower your profit by lowering interest rates, effectively telling your shareholders to take a hike?

No, you wouldn’t. But Tally’s founders, Jason Brown and Jasper Platz, who have venture capital backing from Shasta Ventures and Cowboy Ventures, aren’t worried about bank shareholders.

Before Tally, they started a business that helped consumers borrow money for solar panel installations. After they sold that company, their search for a new project led them to ask why people with great credit did not get rewarded with better interest rates on their credit cards.

Tally makes its credit lines available to customers with at least a 660 FICO credit score, though you will need one that’s a lot higher to receive its best annual percentage rate, which is 7.9 percent. Most people will pay at least a bit more than that. For now, the highest rate is 19.9 percent.

A loan from the company is like a credit card in that the rate is variable and it comes with a credit limit, which will also depend on the credit score. That line may or may not be high enough to pay off all your existing card debt.

Tally is a convenience tool, too. You pay Tally once a month, no matter how many cards it is handling on your behalf. That payment, depending on its size, covers all of the minimum payments on your cards, plus new charges and any lingering Tally debt.

Tally requires its own minimum payment, as a card company would. But you can pay as much on top of that as you want, which the company puts toward your highest-rate debt. Tally charges no origination, annual, prepayment, late or over-the-limit fees.

This is no giveaway, though. Tally gets the money to pay off your cards by bundling the loans it has made to other customers and selling them to investors as asset-backed securities. (Credit card issuers have been doing this for decades now.) Mr. Brown boils it down like this: Tally gets money for one price (from the investors who buy that bundle) and sells it (to consumers) at a higher price. It keeps the difference, minus any losses that it has to cover and whatever it needs to run its business.

The business model won’t work, however, unless the loans Tally gives to consumers cost less than the interest rate their card companies are charging. Otherwise, why would anyone bother signing up?

So why would a consumer take a chance on Tally? After all, personal loans are available to people with great credit from established banks like SunTrust, whose interest rates start at a mere 4.99 percent if you pay off the loan fast enough.

Mr. Brown contends that the two products are not comparable. Personal loans are generally for a fixed length of time, but Tally’s line of credit is open-ended, like a credit card. He is at least partly right, but for people determined to get out of debt and stay out, a personal loan that lasts for a set period can provide a better form of discipline.

Plenty of people with credit card debt may also simply move it from one card company to another every 12 to 18 months, taking advantage of zero percent balance transfer offers. This can work well, as long as the borrower doesn’t miss any payments and the offers keep coming.

I worry more about what may happen once people do sign up with Tally. Its user agreement makes a big deal of the fact that consumers are responsible for helping Tally maintain the links between its own software and the credit card issuers’ websites.

Anyone who has done business with the financial dashboard service Mint knows how often those connections mysteriously break down. Mint is mainly a tracking service. Tally has to actually make your payments or you get into trouble with your card companies.

Mr. Brown said Tally built redundancy into its system by working with more than one aggregator, the third-party services that manage connections with bank sites. Moreover, Tally has a manual payment plan ready if all else fails. Given that it needs to pay your bank on your behalf only once a month, the company assumes that customers will help it resolve any issues before late payments become a problem. We’ll see.

The company also reserves the right to suspend payments to card companies and withdraw a line of credit after two months of missed or returned payments. You pay via a direct link from your bank account, though automatic payments are not required. That means you can choose when to transfer money to Tally each month.

Tally has its own risks, too. “It’s slamming headfirst into headline risk, ” said Mark Adelson, a Tally adviser who is an expert on asset-backed securities and the former chief credit officer of Standard & Poor’s. “There is all kinds of mayhem around Lending Club.”

Mr. Adelson imagined himself as an analyst at an insurance company who helps figure out which asset-backed securities to buy. Then, he imagined his boss stopping by his cubicle for a word. “‘We don’t have any of that Lending Club paper, do we, son? ’” he said. “The right answer is, ‘No, sir, we don’t.’”

If Tally can’t eventually sell its securities, it will probably not last long. For now, Mr. Brown said, it has large financial commitments from both Silicon Valley Bank and a high-net-worth family that is an experienced purchaser of such securities.

“All we’re doing is shifting accounts from Chase” — or another bank — “into a different pool that has the exact same risk profile, and giving institutional investors access to that, ” he said.

The company, in a bid for transparency, plans to let investors log into its site and see how its loans are doing, in aggregate, at any given moment. When I asked Mr. Brown to promise to tell the truth about every loan that it packages into a security, he said the company would.

As for thoughts on Lending Club, he put on a brave face, which is about the only thing you can do when a company a lot like yours gets into trouble just as you’re opening for business. “We want there to be scrutiny, ” he said. “The more scrutiny there is, the more legitimacy there will be in the long term.”

While asset-backed securities peddled by a couple of guys who used to finance solar panels may seem dicey, Mr. Adelson said he was not concerned. “It’s really about using credit cards better and smarter, ” he said. “Pay down the highest rates first. Don’t pay late. Stay aware of what you owe by pooling things into one master account.”

Sure, it would be best if people didn’t carry any card debt. But we’re a long way from that happening. “Anything that helps people manage that debt better, ” Mr. Adelson said, “is a good thing.”