Imagine your life without a good credit score. You’re unable to open a bank account or sign up for a low-cost credit card. It’s complicated, if not impossible, to rent an apartment or buy car insurance. You don’t qualify for affordable loans for college, home buying, or business start-up.
Credit and savings are assets that help households get ahead and stay ahead. Ironically, for low income individuals with no or poor credit and little to no savings, life is more expensive. They often rely on high-fee, short-term predatory loans to meet needs. Paying off that loan often requires getting another high interest loan. This pattern can repeat across generations. AFN members seek and share solutions that helps individuals build a credit history and start saving in ways that work in their current circumstances.
AFN’s brief The Power of Credit Building: Strategies for Funders clearly lays out how credit building works and why grantmakers should care.
Why It’s Important
Philanthropy is nurturing the development of new tools that foster savings and credit building and are relevant to low income individuals.
Increased opportunities to get an affordable loan
Lower interest, fewer fees on loans and credit cards
Improved employment and housing options
Better prepared to absorb economic shocks from unsteady income
Increased future orientation and asset-building goals
More opportunities for entrepreneurship
More and more grantmakers are concerned about the racial, ethnic, and gender wealth gaps and looking for ways to reduce the gaps. In 2013, Latino families net worth was about one-tenth that of white families. African-American families’ net worth was even lower. Native Americans and many immigrants also fare poorly. Despite efforts to provide equal opportunity, the racial and ethnic wealth gap continues to grow. Why?
The reasons are many: systemic bias in the tax system and barriers in accessing capital or credit, less opportunity for intergenerational wealth transfers, college debt burdens, and the paucity of wealth-building institutions in communities of color. In addition, children are not aspiring to college and the education in many public schools is inadequate. These families must have access to aligned opportunities to build credit and savings, to develop a future orientation for college, and to access capital.
Philanthropy is nurturing the nonprofit sector’s development of new financial tools and products that foster savings and credit building in ways that are relevant to low income individuals. Innovators seek solutions within communities, building on existing consumer behaviors. One such example is the social lending circle model, which formalizes the long tradition of informal peer lending circles to help financially excluded communities meet short-term credit needs and build credit. In the process, these borrowers and lenders become active participants in the U.S. financial mainstream. They increase their credit scores and pay down their debt. With financial coaching and goal setting, many are then able to open bank accounts, start small businesses, and purchase a car and a home.
Grantmakers and their nonprofit partners are also integrating credit building and savings support into existing programs. For example, nonprofit lenders can report their borrowers’ loans to credit bureaus. This improves their clients’ credit scores and increases their access to safe and affordable mainstream credit products. By reporting, they provide clients with an additional incentive to make payments on-time. This in turn strengthens the quality of their loan portfolios. Asset-building solutions like these serve communities for the short- and long-term and are what AFN members look to support.
““AFN helps its members make better funding decisions to promote family economic security and asset building.”
Carla Thompson Payton | W.K. KELLOGG FOUNDATION