NP’s national partner CFED highlighted credit building as a key area of attention in their Assets & Opportunity Scorecard release this week. Oregon is ranked 19th nationally in “consumers with Prime Credit” and 23rd in “access to revolving credit.” Itzel Hernandez-Spehar covers Oregon’s credit building efforts below.
My grandmother raised 5 children by herself.
She was a single mother in rural Mexico with only a 5th grade education and she didn’t have many choices. Her dream was to open her own business. She wanted to sell seafood at a small open-air market in Oaxaca City. But there was no money to invest in her entrepreneurial vision. It was hard enough to make ends meet. So with nowhere else to turn, she organized her community and started a tanda.
Tanda—that is the Mexican term for “lending circle” and it works like this: A community member chooses ten friends, family or co-workers and forms a group. Twice a month each member of the groups contributes $100.00 to the organizer, to hold on behalf of the group. At the end of the month, one member of the group gets the “pot”—all $2,000.00. This practice continues on for 10 months. Each month someone takes home $2,000.00 until every member has received the “pot.”
In my grandmother’s day, this was the only way for working class people to finance major purchases or pay for large expenses. So finding people who wanted to participate in a tanda wasn’t difficult. The trick was to pick “responsible” people, with a solid reputation in the community. You did not want someone getting the “pot” and then refusing to participate any further. You needed to be sure they would be there until the end of their commitment—for everybody.
My grandmother had no problem finding people to participate in tandas. She knew her community very well and vetted people prior to their participation. She needed to be certain that they would be reliable members and would honor their commitment each month.
She picked wisely and everyone stuck by each other. And when the tanda had cycled through the whole group—she had her booth! And later, as her business grew, she organized more tandas to expand the booth and hire people to work with her. She became a leader in her community and she was able to buy a house and provide a stable environment for my mother and her 4 siblings.
Today in modern times things haven’t changed that much. People still need access to credit in order to make major purchases such as buying a home or starting a business. The difference is that people no longer rely on their community for credit. They go to financial institutions, banks or credit unions for a loan.
And just like my grandmother—the banks and credit unions screen the people before they enter into a loan agreement with them. They make sure the person is reliable and trustworthy. But banks do not walk around the town to confirm someone’s reputation. Instead, they just pull a “credit report.” If a person has a “good” credit score, the loan gets approved and the person gets to move forward with their goal such as buying a car to get to work or repair a home to make it habitable.
But what if they don’t have good credit? What happens if they have a low credit score? What happens then…?
The answer is harsh. Loans are denied because people are considered high-risk borrowers or it becomes more expensive for them to access credit. For those pressing needs that can’t wait, people resort to taking loans with outrageous interest rates. They also end up paying higher insurance premiums and paying more for basic things such as getting utilities turned on.
In short, a person’s credit score—just like their reputation in the community during my grandmother’s day—goes a long way in determining whether the person is financially successful or constantly struggling.
This isn’t just a theoretical problem. It is a real one, and it’s growing.
According to the Corporation for Enterprise Development (CFED), 56% of consumers in the US have poor credit histories. That’s over half of the 220 million of us with credit files. Furthermore, the Consumer Financial Protection Bureau’s recent report on credit invisibles found that 26 million—or 1 in 10—individuals in the US are credit-invisible—meaning they have no credit history at all. This is a massive problem that affects a large portion of our population—and Neighborhood Partnerships and its partners are working hard on a solution.
Last month, Neighborhood Partnerships (NP) with JP Morgan Chase’s Office of Nonprofit Engagement and the Credit Builders Alliance offered a Credit as Asset training specifically for organizations within the Oregon Individual Account (IDA) Initiative. The training took place at the Northwest Health Foundation and it was a well-attended workshop where NP’s partners had the opportunity to learn about the importance of credit building as an asset-building strategy, review key credit building concepts, explore tools to enhance credit building programs, share innovations in the field and learn from each other.
Building off our new legislation, NP anticipates a second rollout of credit building pilots beginning in April 2016. This is a fantastic opportunity for clients to establish or repair their credit scores, save towards a specific goal, and get match funds from the Oregon IDA Initiative once they have completed their savings plan agreement.
The first Credit-Building IDA pilot began in February 2015 to explore how IDA savers’ deposit transactions could simultaneously build their credit. A working group formed to develop and carry out the pilot, consisting of Innovative Changes, Hacienda CDC, CASA of Oregon, Credit Builders Alliance and Neighborhood Partnerships. The pilot pairs an IDA with a credit-builder loan (a small installment loan for which on-time payments were reported to the credit bureaus). Pairing these products means that the IDA saver could make a single deposit transaction which would both contribute to their IDA and make a payment toward a credit-builder loan. The pilot set out to create a system which streamlines program participation for the saver and promotes administrative efficiency for the service providers.
I am extremely excited about what we can learn from the piloting period. NP will be releasing a summary report on lessons learned thus far in the near future. The IDA team at NP looks forward to hearing from partners how we can support their effort in expanding their current IDA programs to include credit building. If a current IDA partner is interested in piloting credit building IDAs, they are encouraged to reach out to their current Fiduciary Organization (FO).
Even my grandmother is very excited about the work we are doing in Oregon with credit building IDAs because she understands first-hand what it means for a family to have access to credit. At 89, even though she no longer runs the fish booth, she still organizes tandas and finds a way to help others who want to start their own businesses or buy their own home. The last time I called her she asked me how my kitchen remodel was doing. When I told her that the project is taking longer than planned because of the high costs she laughed and said “Itzel, what are you waiting for? It’s time for you to organize a tanda!”