By Arohi Pathak
There are an estimated 26 million people in the United States who are “credit invisible,” meaning they don’t have enough of a borrowing history to generate a credit report. Meanwhile, another 19 million adults have credit records that are considered “unscorable,” which means they have some credit history, but it is insufficient to assess their creditworthiness. In other words, 45 million people in the US are unable to borrow money from a mainstream lender to finance a business, buy a home, pay for college, cover medical expenses or even buy a car to get them to their job.
These problems are compounded by the fact that many Americans who have a scorable credit history lack a high enough credit score to qualify for loans with “prime” interest rates. As CFED’s 2016 Assets & Opportunity Scorecardrevealed yesterday, 51% of consumers don’t have prime credit, meaning if they can take out a loan, they are forced to do so at sometimes exorbitant rates.
Being unable to borrow from a mainstream lender can have devastating consequences on household family finances. One option is to not borrow at all, leaving these households disconnected from opportunities to get ahead. The other option is to turn to payday lenders and check-cashing services. Although families sometimes feel like these alternative financial services are their only option, relying on them means relying on a predatory industry that strips hard-earned money from millions of working families each year. Of course, individual consumers aren’t predatory lenders’ only prey—as we’ll discuss in tomorrow’s online briefing, owners of small businesses often get trapped in the cycle of debt perpetuated by unscrupulous lenders.
Unfortunately, we know there is a strong correlation between income and credit. Lower-income communities and communities of color are more likely to be credit invisible or unscorable. Almost 30% of consumers in low-income neighborhoods are credit invisible and an additional 16% have unscored credit histories. And, unsurprisingly, low-income communities and communities of color are much more reliant on predatory lenders, making their climb toward financial stability much steeper.
Given this correlation, we have a social obligation to help consumers build their credit scores. The good news is that there is a growing recognition of the importance of strong credit, and credit is increasingly being seen as an asset. A good credit score can be the key to unlocking opportunities that propel families up the economic ladder, such as stable employment and affordable homeownership. We see further good news in the many innovative products and services being offered to low-income individuals and communities that help individuals build their credit, and hence their long-term financial security. Financial coaching, small-dollar lending programs designed to help build credit, lending circles and other strategies have proven effective in tackling the credit challenges facing millions of American households.
Three examples demonstrate the range of opportunities before us:
- Lending circles, pioneered by Assets & Opportunity Network Leader Mission Asset Fund, enable friends, family members and neighbors to contribute small loans that, when paid back, help the borrower boost their credit scores.
- Community Development Financial Institutions (CDFIs), such as the Native CDFI Network, provide access to financial supports—including credit building—for low-income individuals, rural communities and communities of color.
- Credit-building loans, such as those pioneered by National Allies like Credit Builders Alliance (CBA), not only help boost credit, but also help families take control of their finances and work toward improved economic outcomes.
Each of these examples proves that although the challenge before us is significant, the solutions are in sight. If you are interested in taking action to help families boost their credit and achieve long-term financial security, learn more during CBA’s Twitter Town Hall, taking place today from noon-3 pm EST, by using #CreditBuildingDay.