A good credit history is crucial in today’s economy. Far more than just a number, a good credit score is a prerequisite for every day 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.i For many low-income individuals with no credit history, “thin credit files”,ii or poor credit, the ability to establish a good credit history is hindered by lack of access to affordable mainstream credit building financial products. In addition, many Americans also struggle with poor credit; approximately 32% of the US had subprime credit scores in 2016. Those with subprime credit scores may pay more or be denied altogether for credit products.iii
Fortunately, innovations among socially responsible nonprofit lenders and other mission-driven financial institutions are helping to bridge the credit gap and support financial inclusion of “credit invisibles” and those with no or thin credit files through affordable credit building products. For example, Mission Asset Fund (MAF) based in San Francisco has formalized a lending process that many in the communities they serve already know very well. Cultures around the world, from China to Mexico, for generations have been creating informal groups with families and friends to lend money to each other. In these lending circle models, participants make equal monthly payments creating a pot of money that is distributed to a different participant each month until everyone has received a loan. MAF offers lending circles across the country and reports their payment activity to help participants build credit.
Other nonprofit lenders offer an array of diverse loan products, such as assistive technology, housing stability, immigration and reentry opportunity loans that help communities meet unique credit needs. For example, reentry opportunity loans can help returning citizens with their immediate needs and put them on the path to successful reentry after a period of incarceration. The Fountain Fund, based in Charlottesville, VA, provides loans to formerly incarcerated individuals with the goal of empowering individuals and their families, reducing recidivism, and creating safer and more productive communities for everyone. Borrowers can use the loans to repay court-imposed fees, start small businesses, or other costs that will help achieve financial independence.
The credit industry and government are also working on solutions to bridge the credit gap. FICO and VantageScore are creating scoring models intended to better score thin file consumers by using consumer banking data, trended data, and alternative data points. In addition, the Credit Access and Inclusion Act, passed by the House earlier this year, would support the reporting of payments for utilities and rent to credit reporting agencies in order to help people establish positive credit scores and in turn help them get access to lower-cost loans.
At the 2018 AFCPE® Research and Training Symposium we further explore this topic in our session entitled “Supporting Credit Inclusion: Financial Product and Credit Scoring Innovations.” 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 in order 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.
ii Individuals with no credit history will not be able to generate a credit report or a credit score. An individual with a “thin credit file” will have a credit report but may not be able to generate a credit score due to insufficient credit history or not enough credit accounts. In both cases individuals are seen as credit risky and inexperienced with managing credit because they have a limited credit history
iii New York Federal Reserve (2016) “Community Credit Chart Book,” retrieved from https://www.newyorkfed.org/medialibrary/media/outreach-and-education/CommunityCredit-2016-BookofSummaryCharts.pdf.