Nonprofits innovate to help low-income people establish credit

Agencies fill gaps that keep the 'unbanked' out of the financial mainstream

By Claire Bushey

Nonprofits around the country are launching innovative programs to help poor people build their credit in order to dodge the costs that accompany a low -- or nonexistent -- credit score.

These programs hinge on borrowers making timely payments on a current debt, then reporting that payment to the three major credit bureaus. Using various methods, the nonprofits act as middlemen, ensuring the credit bureaus receive this positive information. The result? Some borrowers report going from no credit score to a FICO score of 699 in six months, said Ricki Lowitz, senior program officer with the community development organization LISC Chicago.

Nonprofits innovate to help low-income people establish credit

Though people with limited incomes often feel they have more pressing problems than creditworthiness, bad credit means paying more in the form of higher interest rates or putting down deposits for utilities.

"Your life costs a whole lot more if you don't have credit," Lowitz said.

In the past 15 years the ramifications of poor credit have grown, as credit score "mission creep" has set in, said Amy Traub, a senior policy analyst with the New York-based think tank Demos and author of the recently released report "Discrediting America." Credit scores determine not just the interest rates paid on material goods, such as a cell phone or car, but also the pricing of utilities and insurance. Approximately 60 percent of employers use credit reports to screen job applicants.

Good behavior goes undocumented
Yet many low-income people are "excellent money managers" who simply never develop credit histories because they don't use mainstream banks that report information to the credit bureaus, Lowitz said. Some of them avoid banks because they fear hidden fees and going into debt.

In other cases, there are no such financial institutions in their neighborhood. Four Bands Community Fund, which operates a credit-building program in Eagle Butte, S.D., is the only institution that reports to the national credit bureaus within 75 miles.

Utility companies and landlords don't report their customers' or tenants' regular payments because of the cost involved, said Vikki Frank, founder of Credit Builders Alliance in Washington, D.C. It's not cheap to make sure the relevant data is perfect every month, or to settle disputes when it's not.

Payday loan establishments, whose clientele comprises the poor and unbanked, don't report to credit bureaus either. They want to hold on to their customers.

"If they report in, they might build up somebody's credit, and that person could go and use a mainstream bank," Frank said.

Consequently, the only time credit bureaus tend to receive information about low-income people is when the news is bad: a phone bill goes unpaid, a medical debt is sent to collections.

Joining forces to build credit
The 200 nonprofits that belong to the Credit Builders Alliance are trying to change that pattern. Frank, who founded the alliance in 2006 after a stint working for the U.S. Treasury's Community Development Financial Institutions Fund, wanted to make it easier for positive information about low-income borrowers to filter upward to the credit bureaus.

Your life costs a whole lot more if you don't have credit.

-- Ricki Lowitz
LISC Chicago

"Before CBA, nonprofits weren't really looking at credit building, and when I first started the organization ... everyone looked at me like I was crazy," Frank said. "Credit was debt, credit was what people owe. It took a lot of re-looking at the situation to show how much credit really related to how much people paid for things."

Now the alliance provides back-end support to the nonprofits that run credit building programs. The nonprofits report borrower data to the alliance, who in turn report it to the credit bureaus. It saves the individual nonprofits the expense of buying the necessary software and hiring a staffer to oversee the reporting process.

One nonprofit that uses the alliance's services to support its credit building program is the Mission Asset Fund in San Francisco. Fewer than half the households in the Mission neighborhood have a credit score. They're stuck in a vicious cycle, said Executive Director Jose Quinonez: They can't build credit without a loan, but they can't get a loan because they don't have credit.

Low-income residents did have access to lending -- just not the kind that builds credit. When the nonprofit introduced its Lending Circle program in 2008, it formalized a worldwide practice already used in San Francisco's immigrant communities, said Quinonez. Known as susus in Africa, lun-hui in China and tandas in Mexico, lending circles consist of participants pooling their money, then lending it out to each group member in turn.

In the past three years, the nonprofit has overseen $500,000 in peer-to-peer loans with a default rate of zero, Quinonez said. People use their loans to start businesses, bolster their savings and make large purchases. As the loan payments are reported, participants' credit scores rise.

"We want to graduate them into the financial mainstream," he said.

Examples: How nonprofits' credit-building programs work
Nonprofit firm, program Where Lender Loan amount How it works
LISC Chicago's Twin Accounts
Chicago North Side Community Federal Credit Union $250 or $500
The borrower takes out a loan and places the money in a locked savings account, meaning the loan is 100 percent secured. The borrower then pays back the loan at $25 or $45 a month for 12 months. The nonprofit matches every on-time payment.
Results: Some participants without credit scores have built FICO scores of 699 in six months.
Mission Asset Fund's Lending Circle San Francisco
Borrowers pool their money and loan it to each other. Loans vary, depending on the number of participants in a circle and how much they contribute. The nonprofit recommends participants contribute between $50 and $200. For a circle of eight where members contribute $50 a month, the loan is $400. Individuals come to an orientation session at the Mission Asset Fund and form in groups of eight to 12. Each month they contribute a set amount of money to a pool, and the money is loaned to a member of the group. Loans are made until every member of the circle has received one. Group members can participate in up to three cycles.
Results: Participants have raised their credit scores sufficiently to move from the subprime to prime lending category.
Eagle Butte, S.D., Cheyenne River Indian Reservation's Mazaska K'sapa Nitawa (Your Money Wisdom)
Eagle Butte, S.D., Cheyenne River Indian Reservation Four Banks Community Fund
$100 to $3,000 The borrower takes out a loan, usually to start or expand a business, and pays it back over a period of up to two years.
Results: Some participants have raised their credit scores 100 points in six months. Most people see results within a year and a half.

See related: New arrivals to U.S. need to rebuild credit history

Published: July 25, 2011

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