A credit report is a financial resume. It is our financial reputation with the world. However, unlike professional resumes, credit bureaus and not credit seekers define, collect and format the information. And these companies score the information using complicated mathematical algorithms.
For the underbanked, no score or a low score often has more to do with what information is not on the report, than what is on the report. Do you have a client with a perfect history paying rent, utility bills, and even car loans on-time? Clients with a low credit score may not lack creditworthiness. But they still need to build their credit history.
A lack of recent active positive payment information is the number one feature that keeps a score low. This is true not just for New Americans with no credit file but for millions of American-born residents in low-income and underbanked communities. Unfortunately, most businesses who lend to low-income or low-credit families will report bad information when an account is overdue, but they do not report on-time payments.
Learn more about today's credit economy and why many low-income families do not have active accounts.
In today's credit economy, good credit requires good financial behavior AND the public demonstration of our good behavior - we need to make on-time monthly payments and have them reported to a major credit bureau.
CBA's asset-based approach to credit building often starts at recognizing what is not on the report first. When reviewing credit reports, it seems appropriate to focus on the information on the credit report. However, for most underserved and underbanked populations what is on the report is all negative information - late payments, collections, outstanding debt, and judgments. This is because most creditors and businesses report when they have not been paid on time however many businesses do not take the time and expense to report the good ongoing monthly payments. This is a catch-22 for families outside of the mainstream credit system. It can be difficult to find a creditor to extend credit, report it and help new-to-credit into the mainstream.
By integrating credit reviews into the intake process of your projects, you can ensure both you and your client know their financial resume. It is a good diagnostic of the point in time. Whether you are an IDA practitioner, workforce development center, homebuyer program, microenterprise lender, financial education counselor or part of an EITC campaign, pulling a credit report first is a good way to begin working with your clients towards financial economic success. Credit reviews give you that financial snapshot of their financial history, knowledge and behavior. It can help you recognize what patterns the client needs to change - and recognize when they need to build relationships with creditors and financial institutions that help them build credit and wealth instead of strip it.
It is also helpful to understand the credit issues and needs of your community -- not just the score, but the credit profile. Where do your clients borrow money and purchase large goods? Do your clients have high credit card debt or no credit cards? Knowing the right questions to ask will help you get to know your client's credit profiles - and then help them make the right decisions to invest in their future credit.
Take the time to know the credit issues of your target market.
- Do they suffer from no credit or poor credit?
- Have they been locked out of financial products thatreport to the major credit bureaus?
- Do they have medical debt and old collections that are starting to age?
- Do they have a history of paying their bills on-time?
- Do they have credit relationships with banks or credit unions or are they just using a checking account?
- Do they use payday lenders to get through their monthly budget?
- Do they purchase cars from car dealers working on a "Opportunity Price" Buy-Here Pay Here model?
Help clients put Credit into Action with a Credit Action plan including:
- Reviewing a credit report at every client intake
- Encouraging clients to "own" their credit history but think to the future
- Helping them get good credit going by paying their bills on time and having them reported to credit bureaus
- Building a Credit Building Plan with short and long-term goals and tasks
- Connecting clients to credit unions and banks
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