Upgrade adds rewards to its credit cards, diversifies beyond installment loans

Upgrade, the personal loans company that unveiled its first credit card in late 2019, recently closed a $280 million funding round that values the company at $6.28 billion, according to CNBC. That means its valuation has nearly doubled in just four months.

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Why is this Silicon Valley unicorn so hot?

Upgrade has expanded upon its personal loans heritage by positioning itself at the intersection of fast-growing fintech trends, such as buy now pay later, cryptocurrency and neobanking.

It now offers four credit cards, all of which convert balances into installment loans for those who wish to finance purchases with more predictability (and potentially a lower interest rate) than open-ended credit card debt. For instance, Upgrade cardholders are offered fixed payment plans for each purchase that range from 12 to 60 months. These credit lines charge APRs ranging from 8.99% to 29.99%.

This is a twist on the buy now pay later model employed by Affirm (which went public earlier this year and currently has a market cap over $36 billion) and Afterpay (which is in the process of being acquired by Square for $29 billion). Young adults, in particular, are gravitating to this payment method. They seem to like knowing exactly how much they owe and how long it will take them to pay off the loan.

Running the numbers

The average American has $5,525 in credit card debt, according to Experian. If they only make minimum payments at the average interest rate of 16.13%, they’ll be in debt for more than 16 years and will owe more than $6,000 in interest.

Now, let’s say a customer finances that same $5,525 with their Upgrade Card. If they commit to a three-year payback cycle and they’re charged 8.99%, their total interest expense will be just under $800. That’s what someone with better credit is charged, so be sure to evaluate your specific terms if you’re considering an Upgrade Card because some cardholders are charged much higher rates.

On that $5,525 balance, the monthly payments are higher with the three-year Upgrade Card plan (a consistent $175 as opposed to minimum payments that start at $130 and decline along with the balance), but it’s well worth it.

The main benefit is the shorter timeframe. Paying 8.99% is still a significant interest rate that’s much higher than many other forms of debt (mortgages, home equity lines of credit, student loans and auto loans, to name a few). Yes, it’s much lower than the average credit card rate, but carrying the balance for 13 fewer years is what leads to most of the savings. It’s important to pay off credit card debt as soon as possible.

Another good tactic is to consider 0% interest credit cards, which offer interest-free periods of up to 21 months on both balance transfers and new purchases.

Upgrade now offers rewards

Begun as a credit card/personal loan hybrid for people who carry balances from month to month, Upgrade now has a compelling rewards program. Besides the plain vanilla Upgrade Card, which does not offer rewards, there are three additional options. The company says these are aimed at consumers with average to excellent credit, as opposed to the introductory model, which is for those with “improving credit” (likely a euphemism for subprime credit).

The Upgrade Bitcoin Rewards Card is my favorite of the three. It gives 1.5% back on every purchase in Bitcoin. This is a twist on the Upgrade Visa® Card with Cash Rewards, which gives 1.5% cash back (in U.S. dollars) on every purchase. Even though I’m personally not a big crypto fan, I do see why many people are drawn to the concept. And earning Bitcoin rewards via your credit card brings some advantages over buying it with your own money.

For instance, it’s a volatile asset, so investing via rewards is akin to gambling with house money. And earning Bitcoin as a reward on your credit card spending avoids the typical purchase fees that you would likely encounter when buying it on your own.

There is also the Upgrade Triple Cash Rewards Visa®, which gives an unlimited 3% cash back on home, auto and health-related purchases. The eligible categories aren’t very common, which could make this a worthy addition for someone who likes to maximize rewards and has gaps in their existing strategy. Examples include home improvements, doctor bills, gym memberships, car dealers, car repair shops and more. Other purchases earn 1% cash back.

None of these credit cards charge any fees besides interest (except a 1.5% redemption fee if and when Bitcoin Rewards cardholders exchange their Bitcoin for U.S. dollars).

Rewards checking

The third major financial services category that Upgrade has entered is the deposits business. Its rewards checking account, which debuted in early 2021, does not charge ATM, account or transfer fees. It gives 2% cash back when customers use their debit card for common everyday expenses such as groceries, gas, streaming subscriptions, restaurants and utilities. Other purchases earn 1% cash back. The 2% categories are capped at $500 in annual rewards, which equates to $25,000 in eligible spending each year. That’s very generous compared with other debit cards.

Bottom line

I’m excited about Upgrade’s expansion beyond installment loans. It’s a category that has served the company well, but it’s hard to get too excited about rates ranging from 8.99% to 29.99%. The new rewards credit cards and the rewards checking account target entirely new segments of consumers, and they’re competitive even in crowded markets.

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.