Innovative Approaches to Credit Building

Building Assets WebinarApril 23, 2008

Session Highlights

• Credit in today’s economy

• New Ways to Build Credit– Asset-based Credit building strategies– CBA Reporter: Report borrower repayment

to build traditional credit

Mission

To create innovative solutions to help non-traditional financial and asset building institutions serving low and moderate income individuals build client credit and financial access in order to grow their businesses and/or personal assets.

Our Board

CBA has a diverse active board with more than 50% practitioner representation:

– ACCION USA– Association for Enterprise Opportunity (AEO)– Center for Financial Services Innovation– Central Vermont Community Action Council– Virgin Money (formerly Circle Lending)– Community Capital of Vermont– Fox Valley Micro Loan Fund– Justine Petersen Housing– New Mexico Assets Consortium– Opportunity Finance Network– RUPRI Center for Rural Entrepreneurship

Our Work

CBA is implementing its mission through three main activities:

Innovative Products and ServicesCBA Reporter community lenders can provide borrower data through our unique partnerships with major credit bureaus.

Education and TrainingCBA Toolkit is an online resource to collect and share tools and best practices for asset-based credit building strategies.CBA Workshops as webinars and on-site trainings Credit Impact Measure Tool informing how credit reports could provide a cost-effective objective longitudinal measure of economic self-sufficiency

Research and Awareness RaisingCBA works with national partners to understand and impact policy, conduct research, and create better understanding around credit buildingLongitudinal Research with Justine Petersen & St. Louis University

CBA Premise

“A Credit Score is a Financial Asset”

People with a good credit rating will save approximately $250,000 in interest throughout their working lives

Good credit decreases the cost of doing business for micro-entrepreneurs so that they are more competitive in

the marketplace.

A business vehicle will cost $50 less a month on a 36-month loan.

Credit Quiz

Which of the following is calculated in a creditscore?

a. Characterb. Capacityc. Capitald. Collateral e. None of the Above

Why Credit?

• Nationalization of banking and credit industries

• Automated Underwriting Systems (AUS)

• Good score = financial inclusion

Why Credit?

In today’s economy, access to safe and affordable financial services is increasingly determined by an

individual’s credit score.

Credit scores provide: – access to mainstream financing – lower interest rates – safer products – less vulnerability to predatory lenders– access to rental housing, employment, insurance, etc.– less expensive utilities

Credit Catch-22

Families with low or poor traditional credit have few opportunities to build credit

Low credit scores = “underbanked”

• 15 percent of the U.S. population - between 35-50 million people – have no credit files or thin files and are “unscoreable.”

• 25 percent of the population have poor scores (lower than 650 FICO)

“Credit building may be the most cost-effective and efficient asset building tool.”

Robert Boyle, Justine Petersen Chief Executive Officer

The single most important factor in developing and increasing long term assets is attaining and maintaining a high credit score.

• As advocates and practitioners we have a responsibility:– to recognize how important good credit is in our financial

culture, and by contrast how debilitating bad credit is– to convey information to our client/customer about how to

begin to get good credit and how to safeguard or improve credit if hard times hit.

Credit building strategies

Credit Quiz

Which of the following data is most important to your credit score?

a. Getting a $10,000 raiseb. Winning the lotteryc. Purchasing a $100 shirt on your Visa card d. Increasing your monthly savings by $100 month

Credit building strategies

Step 1 : Credit Education“many people are creditworthy, but not credit educated”

Impart importance of good creditHelp your client “own” their credit history

Step 2 : Know the Score

Know the credit profile of your clientsPull a credit report at every client intake

Credit Quiz

The credit bureaus define credit repair as:

a. Correcting inaccurate information on a credit report b. Working with a credit counseling agency to create a debt

management plan c. Disputing all negative information on your credit report

every month, even if it is true d. Improving a credit score by making on-time payments on

a small credit line

What is Credit Building?

X Credit Repair - help individuals remove information on the credit report they know to be true

? Credit Counseling - counsel clients and be able to offer them “debt management plans”

! Credit Education - provide general educational information around credit through websites, workshops, etc.

! Credit Coaching - provide individual support and strategies for people to create or improve their credit profile

! Credit Building - provide asset building products and services to help people create or improve their credit profile

What’s in your score

• 35% -- payment histories on your credit accounts, with recent history weighted a bit more heavily than the distant past.

• 30% -- amount of debt you have outstanding with all creditors.

• 15% -- how long you’ve been a credit user (a longer history is better if you made timely payments).

• 10% -- very recent history, based on your efforts to obtain loans or credit lines in the past few months.

• 10% -- mix of credit you hold, including installment loans (like car loans), leases, mortgages, credit cards.

Traditional F

ICO

Credit Quiz

A credit bureau defines someone as a thin fileif their report only contains? (choose all that apply)

a. a mortgage and one credit cardb. three collections accounts with open balances

unpaid for 24 months c. one auto loand. four credit cards none which have been used to

make a purchase in the last six month

Credit Building Strategies

Step 3: Get the Good Stuff Going

• Build NEW good credit versus dwelling on old bad credit. New on-time payments improve your credit more quickly than paying off old debt

• Partner with a financial institution to open a Secured Credit Card

• Report a Loan

Credit Quiz

You have four credit cards but no longer use the two older cards which you’ve had for 10 years. Closing the older cards will most likely:

a. Increase your scoreb. Decrease your scorec. Not impact your score

Credit Building Strategies

Step 4: Create a Credit Action Plan• Create a plan to meet credit builder goal

• Review the credit report once a year

• EITC refunds as micro tax credit

Credit Building Strategies

Step 5: Delve Deeper out of Debt• Dispute credit report inaccuracies

• Negotiate old debt

• Consolidate debt into business loans

Credit Quiz

You are a prospective homebuyer with a thin credit profile. After budgeting, you calculate you have $15 per month to work toward your goal of buying a house. What is the best order of the following strategies to reach this goal?

a. Pay off an old collections accountb. Deposit in an IDA account matched 3:1.c. Open a credit builder installment loand. Open a credit card, purchase needed gas or groceries,

and pay $15 a month on your credit card bill.

Credit Builder Products From the Field

Loan Amount: $150.00Interest Rate: Flat $30.00

Term: 12 monthsMonthly Payment: $15.00

Success: • Ms. Jones filed Chapter 7 Bankruptcy in January 2006. In September 2006, her

credit report accurately reported zero balances on all accounts and no credit score. She opened a Credit Builder Loan and made six on-time payments. In February 2007, her credit score is 637.

• Ms. Clemons had $4,500 in unpaid collections and a $1,500 civil judgment. In July 2006, she had no good lines of credit. Her credit score was 457. In September 2006, she opened a Credit Builder Loan and a US Bank secured credit card. She made six on-time payments to each. In February 2007, she still had $6,000 in unpaid collections and civil judgment and her credit score is 557 - a 100 point increase.

Justine Petersen’s Credit Builder Loan

Credit building example:

Mr. R’s Story

December 2006

Mr. R comes to Justine Petersen for loan counseling.

Initial credit score = 513.

Advised to open new lines of credit.

+2 months

August 2007

Credit score was 619 -- credit score jumped 106 points!

Sent dispute letters to credit bureaus.

February 2007

Mr. R opens JP Credit Builder Loan and secured credit card from U.S. Bank.

+ 6 months

December2007

Credit score now = 635.

Inaccurate information removed from report per dispute letters.

+ 4 months

NYANA’s Step Up Loan

Typical Loan Amount: $500.00Interest Rate: 12%

Loan Term: 6 months

SuccessNYANA offers $500 loans to micro clients who have no score. After 6 months, they have seen scores go up to 660, enabling them to make a larger business capitalization loan and/or help clients access other business credit.

Credit Builder Products From the Field

Four Bands Credit Builder Loan

Loan Amount: up to $2,500Term: 24 months

Interest Rate: 10.25% -12.25%

SuccessMr. J came to Four Bands in March 2005 with a credit score of 460. He received credit education and in September 2006 qualified for a credit builder loan of $2,100. In February 2008, his score is 547.

Credit Builder Products From the Field

Choosing a credit builder

product

• Define your organization’s mission

• Define your target audience

• Assess products to meet need

• Assess partners to meet need

Questions?

Leverage your Lending:CBA Reporter

Whether you have 5 loans or 500, CBA is a one-stop shop for reporting!

Few nonprofit and other non-traditional small lenders are furnishing loan data to the credit bureaus.

– Credit bureau barriers for small loan portfolios – Technology gaps– Need for support and technical assistance– Staff capacity

There is strong evidence that a majority of the 1,000 nonprofit lenders in the US have a keen interest in reporting credit history information on their clients.

Non Profit Challenge

CBA’s model is to develop diverse partnerships to serve the asset building field.

– Major Credit Bureaus: Experian, TransUnion– Alternative Credit: PRBC, Fair Isaac– Federal Reserve Banks– Professional Associations: AEO, Opportunity

Finance Network, IDA Network, NFCDCU

“Enabling CBA’s clients to report data to us expands the credit system to many individuals who have not had the benefits of an established credit history in the past. We applaud CBA for their pioneering work, and we are looking forward to seeing the results of our joint efforts.”

Zaydoon H. Munir, Senior Vice PresidentExperian

CBA Reporter offers

– Streamlined membership process to major credit bureaus– On-going technical assistance and management support – Centralized e-Oscar online dispute processing – Up-to-date information with credit bureau policies and credit

industry issues– Knowledge-sharing about innovative new loan products and

services– Most importantly, a new tool to build stronger credit and a

better future for the low-income, unbanked, and underserved families you serve

Why Report?

• Stronger Loan Portfolio • Legitimacy • Diversified Loan Portfolio • Cost-effective Asset Building • Measurable Community Impact • Better Borrowers• Stronger Bank Partnerships • New Fundraising Tool • Management Efficiencies• Opportunities for clients to build credit

Join CBA

Fill in the Join Us! survey at

www.CreditBuildersAlliance.org

CBA Reporter

Pricing:

• $325 set-up fee includes all credit bureau application and site visit fees

• $600 annual Reporter membership dues includes e-Oscar account ($85), monthly upload support, on-going technical assistance

Total price = $925 first year then $600 annually

Vikki Frank

Executive Director

vikki@creditbuildersalliance.org

www.creditbuildersalliance.org

Tel: 202-730-9390

Dir: 202-368-0500