For teenagers, the first paycheck is an on-top-of-the-world moment. The exhilarating feeling that comes with earning your own money – and being the one in control of what to do with it – is a coming-of-age milestone. But like many choices teenagers face as they grow up, financial decisions can be fraught with the potential to make mistakes that could last a lifetime.
Research shows the overwhelming majority – over 80% – of credit scores are established before the age of 25. But increasingly, young people, particularly those from low-income neighborhoods or communities of color, are among those who are “credit-invisible” or unscored, which can be as big of a barrier to financial opportunity as poor credit.
“We see young people all the time who are not part of the credit system because they have a fear of acquiring debt,” said Dara Duguay, Executive Director of Credit Builders Alliance, a national organization dedicated to helping organizations move people from poverty to prosperity through building credit. Duguay notes a lot of young adults are choosing to have fewer credit cards, to walk or uber instead of purchasing a car and taking out a car loan, or are postponing home ownership. “They are credit invisible by choice – but it is not going to serve them well in their lives. Good credit is a must in today’s society.”
Credit reports – more important than ever before
In past decades, good credit was essentially needed to obtain lower interest rates on financial products like credit cards. Today, credit reports are used much more widely – from landlords screening potential tenants for rental housing to employers screening potential hires. Utility companies often require a deposit from those with poor or unscored credit to turn on service. And auto insurance companies are joining the more traditional industries like mortgage lenders in basing rates on credit scores.
According to Boston Builds Credit, a partnership of the City Of Boston’s Office of Financial Empowerment, United Way of Massachusetts Bay and Merrimack Valley and LISC Boston, more than 250,000 residents in Suffolk County have either a subprime or no credit score. This contributes to the growing issue of “expense inequality” among Boston residents, because the lack of good credit can result in individuals paying over $200,000 in additional interest and fees over the course of their lifetimes. Boston Builds Credit is funded by Citi, Bank of America and the lead partners.
The importance of good credit is a critical lesson that every young person needs to learn early. That first paycheck is an opportunity to teach about banking, savings, and credit-building. In low-income communities, there is the added need to educate about the importance of establishing good credit, particularly in families who avoid credit cards and loans as a strategy to avoid debt.
That’s why the City of Boston’s Office for Financial Empowerment recently launched the Credit Building Initiative for Working Adults, a partnership with Citi Community Development. This initiative provided over 300 participants ages 18-28 with a series of credit workshops, one-on-one financial coaching from its partner Working Credit NFP, and access to a secure savings and loan product designed to build credit.
A recent evaluation of the initiative conducted by the Northeastern University Dukakis Center found participants had improved credit history, increased credit scores and decreased delinquency.
“If we want to begin to address inequality and household financial vulnerability, we must ensure that none of our residents is ‘invisible’ any longer,” says Trinh Nguyen, Director of the Mayor’s Office of Workforce Development and Office of Financial Empowerment in a recent post for Citi Community Development. “Only then will Boston be a city that can be considered truly economically resilient for all Bostonians.”
Pathways to financial opportunity
This year, United Way is launching two key initiatives aimed at reaching youth who are disconnected from school or employment, in an effort to ensure they are on pathways to financial opportunity:
- In partnership with State Street Foundation and organizations serving disconnected youth ages 18-24, United Way is piloting an initiative to connect young people to high-quality financial coaching and services. The goal of the partnership is to measure and track youth educational and career outcomes, as well as financial outcomes such as prime credit scores, savings, debt reduction, and access to public benefits.
- United Way and a portfolio of community partners are working to create a system of outreach, connection and referrals, as well as education, training and job placements, to youth living in subsidized housing who are under-employed, unemployed, or not enrolled in an education or training program. Services will include college and career navigation services, job search and placement services, and financial coaching.
“Research has shown that in order to be successful in supporting youth in obtaining educational credentials and retaining jobs, programs must be designed to appeal to youths’ interests and motivations, as well as to meet their individual needs,” said Karley Ausiello, Senior Vice President for Community Impact.
“United Way has a history of working with nonprofits focused on developing pathways for opportunity youth and promoting financial capability of adults through financial coaching and integrated service delivery,” Ausiello added. “Together, we can help close income and wealth gaps by ensuring youth and adults earn enough to support themselves; and have the skills and knowledge to manage their household expenses and build assets for the future.”