These days it’s impossible to get anything significant—a phone, car, or house—without having your credit score checked first. And the penalty for having a low score—or worse still, no score—is higher than you might think. According to the non-profit Credit Builders Alliance, individuals with poor numbers can pay $250,000 in extra interest over their lifetime. And low scores don’t just stop people from buying consumer goods; they are also a drag on enterprise and job creation, depriving those who want to create businesses from the funds to do so.
A new pilot project from the Aspen Institute’s FIELD program and Citibank’s Citi Foundation aims to boost access to financial services through a mix of education and secured credit cards. Over the next two years, Aspen and Citi will work through five microenterprise organizations, which will give secured credit cards and in-depth "credit coaching" to 600 selected clients. The individuals range from store owners to small transport operators.
To get a card, clients deposit a few hundred dollars in a savings account, against which they can borrow cash of the same value. As they successfully pay off the card, their credit score increases until they are able to borrow on the open market. The multi-ethnic microenterprise organizations range from the Latino Economic Development Corporation in Washington D.C, to the Pacific Asian Consortium in Employment in the L.A. area.
The idea behind the pilot has already seen success in St. Louis with programs administered by Justine Petersen, a micro-lender and advocacy group. For example, one barbershop owner, who had a credit score that was too low to qualify for a typical microloan, was given 16 months of credit coaching and access to a secured card. He was able to raise his score by 82 points, and later qualified for a microloan that he invested into his business.
Elaine Edgcomb, director of FIELD, says the aim now is to see if the model will work nationally. The pilot will look at creditworthiness before and after clients enroll in the scheme; how the program improves access to mainstream financial services and business support; and how effective non-profits are in delivering secured credit products.
Citibank wants to see if the microenterprise groups potentially offer a better vehicle than their own channels. "One of the reasons Citi wanted to be involved was that non-profits are more closely connected to this demographic. They know and understand this customer," says Edgcomb.
According to Edgcomb, it's important that people are trained in how to use credit before they take on too much risk. "The secured card gives people a safe way because there is a limit on what they can borrow. It reduces the risk for the client, as well as the credit card company." And, of course, it provides an opening for beleagured small business owners to pursue their goals.
[Image: Flickr user Fotero]