A good credit history is crucial in today’s economy. Far more than just a number, a good credit score is a prerequisite for everyday financial services like a low-cost credit card, a bank account or car loan. A good credit history can make the difference in accessing the affordable lending products necessary to go to college, buy a home, or start and grow a small business. Renting an apartment, paying for car insurance, signing up for utilities and even landing a job can also be affected by a person’s credit history – or the absence of one. Yet, 26 million Americans are “credit invisible,” meaning that they do not have any credit history with the three main credit reporting bureaus.
For many low-income individuals with no or “thin credit files,” the ability to establish a good credit history is hindered by lack of access to affordable mainstream credit building financial products. Individuals with poor or thin credit often rely on payday loans to meet their credit needs. The high-cost of these loans, combined with the fact that on-time payments are not reported to the credit bureaus, prevent people from building credit and other assets, often across generations. Without a strong credit history, it is difficult, if not impossible, for households to get and stay ahead.
Credit building is a powerful tool that helps individuals and small businesses take control of their financial lives and supports asset-building goals, such as homeownership, small-business ownership and the pursuit of higher education. Credit building is defined as the act of making on-time monthly payments on a financial product such as an installment loan or a credit card that is reported by the creditor to the major credit bureaus. Credit Builders Alliance (CBA) believes that responsible credit building pairs reporting payments to the credit bureaus with relevant and timely credit education; opening and successfully managing financial products is key to building and maintaining a good credit history.
A good credit history is not only an asset; it is the means to greater and more sustainable financial stability, savings and asset building opportunities. Over the last ten years, nonprofit and community-based organizations, financial capability practitioners, and even local governments have begun to embrace credit building as integral to helping low- and moderate-income and other underserved constituents build and sustain financial assets. This progress has been accomplished be innovating new credit building products, expanding access to responsible credit building products through relationships with financial institutions, and raising the profile and need for innovative solutions such as alternatives to payday lending and Rent Reporting. Financial coaches and counselors can continue to leverage their resources to support responsible credit building programs and policies that combine access to safe, affordable financial products with skilled and relevant financial education. In this way, they create ideal conditions for individuals and families to build credit and assets.
Credit Builders Alliance (CBA) is a nonprofit organization creating innovative solutions to help non-traditional financial and asset building institutions, serving low and moderate-income individuals, build client credit and financial access to grow their businesses and/or personal assets.
[i] CFPB Office of Research (2015) “Data Point: Credit-invisibles,” retrieved from http://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-invisibles.pdf.
Guest Contributors: Carmina Lass and Alesha Klein, Credit Builders Alliance
Stop by CBA’s exhibit booth at the 2017 AFCPE Symposium to learn more about how they can help you move people from poverty to prosperity through credit builiding