For many, poor credit is the biggest barrier standing in the way of financial opportunity.
FACT: More than 250,000 people in Suffolk County have either no credit scores or poor credit scores. That’s more than a quarter-million people who have no savings buffer for income ups-and-downs or emergencies, which can very quickly lead to a financial crisis.
Credit, whether it is good or bad, affects many aspects of our daily lives. Trying to find a more affordable apartment or a better mortgage rate? Need a new job, car, or even just a cell phone? It’s all about credit. When you have poor credit, even the simplest things seem impossible.
Joan’s crisis began with a layoff from her job. With no income and no health insurance, Joan was on the brink of eviction and homelessness. She came to the Lynn Family Success Center, operated by United Way and Lynn Housing and Neighborhood Development, in March of 2015 to apply for Supplemental Nutrition Assistance Plan (SNAP) benefits, or food stamps, and MassHealth. That’s when she was referred to employment counseling and financial coaching.
Employment counseling helped Joan update her resume and begin employment search, while the financial coach started developing a plan for savings and credit score improvement. She found stable housing with a family member and was able to weather her crisis receiving the SNAP benefit. With her updated resume, Joan was able to find full-time employment with benefits earning $20.00 per hour. With her new income and benefits, Joan was able to give up both MassHealth and SNAP to achieve self-sufficiency. Furthermore, with her financial coach, Joan has been able to increase her credit score from 545 to 621.
Not just a local issue
Credit building is an issue affecting people all across the country. According to the Corporation for Enterprise Development (CFED), nationally one in five consumers has no credit history or credit score, and 51% of credit users have subprime credit. The Commonwealth as a whole fares better than most other states – over 57% of Massachusetts consumers have prime credit scores, which is the 7th highest ranking in the country.
Still, that means 43% of Massachusetts residents struggle with credit, making them more likely to be targets of predatory lenders and check-cashers. In fact, the Credit Builders Alliance estimates that the average subprime consumer will pay $200,000 more in interest and fees over a lifetime than those with prime credit. That is a huge amount for any family, but especially for those struggling to make ends meet.
“In Boston, where 1 in 3 residents have either poor or no credit, we want to inform residents on why credit matters,” says Trinh Nguyen, Director at the Mayor’s Office of Workforce Development. “A few simple practices – like paying bills on time and keeping credit utilization low – can help people build credit surprisingly quickly which will, in turn, help them make smart choices and save for the future.”
United Way, in partnership with the City of Boston and the Local Initiatives Support Corporation, is examining ways to build consumer understanding of credit score calculations and the importance of a good credit profile.
“It is a contributor to social inequality and poverty that is often overlooked,” says Gail Sokoloff, Senior Director for Community Impact at United Way of Massachusetts Bay and Merrimack Valley. “We are blazing a new pathway to financial opportunity by developing a targeted strategy to educate the public and raise more awareness among consumers of the process of getting and building credit.”
The good news?
People are often motivated to build credit because they know it can lead to better financial opportunities and can help them weather a financial storm. There is growing evidence that credit-building products like small credit-building loans, secured credit cards, rent reporting and peer lending groups are effective tools, especially when paired with financial coaching.
Clients who accessed services through United Way’s financial opportunity centers saw a 52 point credit score increase, and clients in our financial opportunity programs saw a $313 average increase in their monthly net income and an average net worth increase of almost $6,000. Over 520 people were placed in jobs.
“Good credit opens doors in many ways and can even lead to a better job,” says Jerry Sargent, President at Citizens Bank, Massachusetts. “That’s why understanding how to monitor and maintain good credit is so important for Massachusetts residents.”
By focusing on simple savings and budgeting skills, and basic tips to improve credit, financial opportunity should not be out of reach for anyone.