Build Credit. Build Assets. © 2008 Credit Builders Alliance, Inc. Some rights reserved. CREDIT BUILDERS ALLIANCE and the accompanying Logo are trademarks of Credit Builders Alliance, Inc. This document is licensed under a Creative Commons Attribution-Noncommercial-Share Alike License (US/v.3.0). Noncommercial uses are permitted on the condition that you include an attribution to Credit Builders Alliance. If you alter, transform, or build upon this work, you may distribute the resulting work only under the same or similar license to this one. More information regarding the license is at: http://creativecommons.org/licenses/by-nc-sa/3.0/ . Requests for permissions beyond the scope of the license should be directed to Credit Builders Alliance, Inc., at www.creditbuildersalliance.org/. Credit Builders Alliance ("CBA"), a not-for-profit organization, makes this information available for informational purposes only. This information is not intended as legal, financial, or other advice, and you and your clients should consult qualified advisors before making any decisions. CBA does not represent that any of the information will produce results. What is credit? © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credo: CRED o (kreed’ o) v. trust Credit : CRED it (kred’ it) n. value; worth © 2008 Credit Builders Alliance, Inc. Some rights reserved. Goals By the end of this workshop, we hope you will: Better understand today’s credit economy Value credit as a financial asset Have new strategies to build credit Connect credit building to your diverse work Asset-Based Approach to Read a Credit Report Access credit reports and scores Get Good Credit Going --credit builder loans Credit Reporting to major credit bureaus Options to create alternative credit histories Options to measure outcomes with credit reports Find Credit Builder Toolkit a helpful clearinghouse for tools and information around credit building © 2008 Credit Builders Alliance, Inc. Some rights reserved. CBA Mission To create innovative solutions for asset building organizations to help low and building organizations to help low and moderate income families build stronger credit and financial access in order to grow their businesses and/or personal assets. © 2008 Credit Builders Alliance, Inc. Some rights reserved. CBA Board CBA has a diverse active board representing: – ACCION International – Center for Financial Services Innovation -ShoreBank – C tlV tC it Ati C il/C it Central Vermont Community Action Council/Community Capital of Vermont – Church of the Brethren Credit Union – Ethiopian Community Development Corporation EDG – Justine Petersen Housing – New Mexico Assets Consortium – Opportunity Finance Network – RUPRI Center for Rural Entrepreneurship – Virgin Money USA (formerly CircleLending) © 2008 Credit Builders Alliance, Inc. Some rights reserved. CBA’s Work CBA is implementing its mission through three main activities: Innovative Products and Services CBA Reporter community lenders report borrower data through our unique partnerships with major credit bureaus. CBA Access negotiating low cost credit reports for lending, credit gg pg, education, and measuring outcome Education and Training CBA Toolkit online resource sharing tools, strategies and best practices CB 5-Step Training and Workshops as webinars and on-site trainings Research and Awareness Raising Longitudinal Research with Justine Petersen & St. Louis University Credit Impact Handbook how credit reports could provide a cost- effective objective longitudinal measure of economic self-sufficiency © 2008 Credit Builders Alliance, Inc. Some rights reserved. Part 1 Today’s Credit Economy © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Industry Today Big Banks. Big Credit Bureaus. – National credit bureaus consolidated data reporting processes and reduced intermediaries – National scores facilitate Automated Underwriting Systems (AUS) © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Industry Today Fair Credit Reporting Act – Credit bureaus more responsible for integrity and accuracy of data in databases – Consumers have right to dispute information and receive verified response within 30 days – Data providers need to report consistently and verify data upon dispute But…all this in a VOLUNTARY system © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Industry Today All this in a VOLUNTARY for-profit system Relationships big & ? Relationships big & ? Increased costs to reporting Data in/Data out Issues Underrepresented Low-Income Collection Agencies And Minority Communities to the rescue! © 2008 Credit Builders Alliance, Inc. Some rights reserved. Catch-22 Good Credit scores provide access BUT BUT Individuals, entrepreneurs and communities with low or poor traditional credit have few opportunities to build credit © 2008 Credit Builders Alliance, Inc. Some rights reserved. Why Credit? Provides access to prime, safe financial services is increasingly determined by an individual’s credit score. Helps families build wealth – a home, a business, education. Impacts opportunities and access to: • rental housing • car insurance • auto purchases • employment • access to checking, savings, and investment accounts • utilities and phones • medical services © 2008 Credit Builders Alliance, Inc. Some rights reserved. Financial System: Cut Two Ways 40% of US population have no score or a low credit score • 15% of the U.S. population -between 35-50 million people – have no credit files or thin files and are “unscoreable.” • 25% of the population have poor scores (lower than 650 FICO) Low credit scores = “underbanked” 40% of US population are using alternative financial services (CFSI) © 2008 Credit Builders Alliance, Inc. Some rights reserved. my car broke down… . and I had the most peculiar safety net. © 2008 Credit Builders Alliance, Inc. Some rights reserved. Two-Tiered Financial System Credit Card(PIF) 0% loan 30 days Credit Card (balance) 22% APR PayDay Loan 400% APR © 2008 Credit Builders Alliance, Inc. Some rights reserved. Part 2 Nonprofit Role in Today’s Credit Economy © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Builder 5-Step © Step 1 : Rethink: Credit as an Asset Impart importance of good credit Step 2 : Know the Score Pull a credit report – Financial Resume – at every client intake Pull a credit report Financial Resume at every client intake Step 3 : Get Good Stuff Going Build good credit first before dwelling on bad debt. Step 4: Create a Credit Action Plan Integrate credit into income, saving, asset and budget goal planning Step 5: Delve Deep out of Debt Save first and then pay off debt © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Building Strategies Step 1 : Rethink: Credit as an Asset “many people are creditworthy, but not credit educated” Impart importance of good credit Help your client “own” their credit report --it is their FINANCIAL RESUME Credit Builder Tool: Credit Builder 5-Step © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit building is Asset Building “Credit building may be the most cost-effective and efficient asset building tool.” Robert Boyle, Justine Petersen Housing, St. Louis JP’ P i JP’s Premise • 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 her credit if hard times hit. CBA Premise “Credit Score is a Financial Asset” P l ith d dit ti ill i tl People with a good credit rating will save approximately $250,000 in interest throughout their working lives A homeowner will save more than $250,000 on a 30-year fixed $300,000 mortgage. A car buyer will save up to $50 a month on a 36-month car loan. © 2008 Credit Builders Alliance, Inc. Some rights reserved. What is Credit Building? X Credit Repair -help individuals remove information on the credit report they know to be true ? Credit Counseling -created to offer “debt management plans” as bankruptcy li alternative ! Credit Education -general educational information around credit through websites, workshops, etc. ! Credit Coaching – goal-oriented relationship to offer strategies to change behavior so clients build and maintain credit and assets ! Credit Building -asset building products and services to help people create or improve their credit © 2008 Credit Builders Alliance, Inc. Some rights reserved. Client Approaches Overview Case Management • Coordinate provision of resources and services for clients Credit Counseling • Focus on a specific event or problem • Deals with symptoms, not cause – i.e. too much debt, foreclosure • Crisis orientation • Shorter relationships provides help through issue -i.e. traditional credit counselor will offer debt management plan Credit Coaching • Focus on skill building and changing behaviors • Focus on long-term outcomes • Teaching content based on client’s unique self-defined needs and goals • Ongoing, collaborative process © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Coaching Credit Coaching What is ongoing, collaborative process? • Support to practice new behaviors • Help identify resources without managing service delivery • Empower clients to gain greater clarity on what is important to them in life • Facilitate building a comprehensive plan that supports desired outcomes • Effectively coach throughout the implementation of plan © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Building Strategies Step 2 : Know the Score Know the credit profile of your client base Pull a credit report at every client intake What is driving the score? Is it what’s on the report ---or what’s NOT on the report. Credit Builder Tools: Community Credit Profile Survey Consumer Access to Credit Reports Nonprofit Access to Credit Reports Asset-Based Approach to Reading a Credit Report (in Outcome Handbook) © 2008 Credit Builders Alliance, Inc. Some rights reserved. 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 amount of debt you have outstanding with all • 30% 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. © 2008 Credit Builders Alliance, Inc. Some rights reserved. VantageScore Available credit Recent Payment 7% credit credit history Depth of credit Balances 32% 23% 15% 13% 10% Utilization What is the new VantageScore? • Created jointly by the three major credit bureaus • Range is 500 to1000 (FICO scores ranges from 350 to 850) • Same model for all three bureaus --only score difference will be different data across bureaus • Scores for thin file and bankruptcy populations Source: www.vantagescore.com © 2008 Credit Builders Alliance, Inc. Some rights reserved. What is credit? Demonstrating good financial behavior based on information not in a traditional credit report • Fannie and Freddie require mortgage underwriters to accept Rent plus 2 lines of “alternative credit” when no credit exists p PRBC (now Microbilt) is a new credit reporting agency that allows individuals to build an alternative credit report • Taking alternative credit out of the shoebox and Making alternative credit verified and automated Future: Utility and Telephone payment reporting. What does this mean for consumers? © 2008 Credit Builders Alliance, Inc. Some rights reserved. Accessing Credit Reports and Scores Client Access www.annualcreditreport.com; www.myfico.com Non-profit Access • Lenders can pull Hard Inquiry reports for underwriting • HUD Housing and Credit Counseling certified can pull soft inquiry CBA new partnership with TransUnion! ALL NONPROFITS can pull soft inquiry reports from TU © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Building Strategies Step 3 : Get the Good Stuff Going Build NEW good credit first before dwelling on old bad credit on old bad credit. New onNew on--time paymentstime payments improve your credit quicker. Partner with a financial institution to open a Secured Credit Card Create a Credit Builder Loan. Report it through CBA. © 2008 Credit Builders Alliance, Inc. Some rights reserved. Just in Time Education: Offer small loans Offer small loans CBA Reporter Whether you have 5 loans or 500, CBA is a one-stop shop for reporting! © 2008 Credit Builders Alliance, Inc. Some rights reserved. “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 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, Sr Vice President, Experian © 2008 Credit Builders Alliance, Inc. Some rights reserved. JP Credit Builder Loan Loan Amount: $150.00 Interest Rate: Flat $30.00 Term: 12 months Monthly 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. December 2006 +2 months Mr. M wants to buy a home. He comes to Justine Petersen. JP pulls credit report. Initial credit score = 513. Advised to open new lines of credit. Mr. M February August December 2007 2007 2007 + 6 months + 4 months Mr. M opens JP Credit score Credit score Credit Builder now = 635. was 619 - Loan and credit score Inaccurate secured credit jumped 106 information card from U.S. points! removed from Bank. report per Sent dispute dispute letters. letters to credit bureaus. May 2009 Mr. M is serious about buying a house Credit score = 652 12 bounced checks reporting on credit report. These are not his, client has never bounced a check. Sent a dispute letter. October 2009 Client comes in and we pull credit. Credit score = 663 Bounced checks are taken off of credit report. Mr. M cont’d December 2009 Mr. M’s wife has twins. Family has decided to put off homeownership till things settle down. 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 Review the credit report once a year Save! EITC refunds Credit Builder Tools: Credit Builder Action Plan Practitioner Tip Sheets – EITC, Workforce Development Tips for managing a credit card © 2008 Credit Builders Alliance, Inc. Some rights reserved. CPCDC Employee Loan Program Loan Amount: $500-$1,500 Target Market: Tribal employees Loan Ty Loan Typepe: Unsecured: Unsecured Interest Rate: 16% Term: 12-18 months Success story Ms. Anderson took out an employee loan in April 2006. She did not have a credit score and her credit report had old collections & other history not reporting for several years. In August 2007, she had paid off the first employee loan and her credit score was 667. She took out a second loan and in March 2008, she was able to finance a car, something she feels she would not have been able to do before taking out the loans. Ms. Young October January April September December 2006 2007 2007 2007 2007 + 4 months + 4 months + 6 months + 4 months Ms. Young comes Takes out to CPCDC with $500 nearly $19,000 in employee debt. She enrolls loan and in the credit starts making builder IDA on-time program. reported Initial credit payments. score = 476. Uses EITC refund to pay off $2,500 in collections and payday loan debt. Completes IDA program: saved $786 ($2,359 with match). Uses IDA savings to pay back debt. Credit score is 603. Completed 42 hours of financial education. Credit Builder Products From the Field People’s Community Partnership Federal Credit Union Fresh Start Loan Loan Amount: $300-$3,000 Interest Rate: 6% Term: up to 24 months Target Market: the unbanked/underbanked in Oakland, CA Loan Type: Secured (by savings accumulated from loan payments. Loan funds are released after payment schedule is completed.) Chautauqua Opportunities Appliance Loan Loan Amount: $500 -$1,400 Loan Type: Secured Interest Rate: Prime +3 (around 8%) T: 13 Term: 1-3 years Target: very low-income clients Success Story: Annie, a single mother, works 3 jobs to provide for her children. She had no stove or fridge. She was cooking on a hot plate and storing food in a cooler. Her children were at risk of removal from the home by the state protective services agency. With an appliance loan from CODI, she has been able to get a refrigerator and a stove in her home and keep her children. Credit Builder Loan Client Profile: More than 50% of 1,000 clients has no credit profile Other 50% have credit score average of 600. Most low score from default/bad tradelines only. Lots of Payday loan debt led to debt consolidation loan Product Loan Amount: up to $2,500 Term: 24 months Interest Rate: 10.25% -12.25% Process: 1) Credit report review 2) Confirm outstanding debt 3) Complete Credit when Credit is Due course 4) Receive loan up t $2,500 to pay off debt 5) Build credit history and access business loans Credit Building Strategies Step 5: Delve Deeper out of Debt Dispute credit report inaccuracies Negotiate old debt – make lump sum payments Consolidate debt into lower cost loan Credit Builder Tools: Negotiating with Collections Agencies Hot Topics: Medical Debt and Credit © 2008 Credit Builders Alliance, Inc. Some rights reserved. Credit Outcome Measurement Tool Credit reports could provide a cost-effective objective longitudinal measure of financial behavior and behavior ch tlk tcli t d it t change to look at client and community outcomes. Credit reports and scores are recognized and understood by many types of businesses = don’t need to explain as indicator. © 2008 Credit Builders Alliance, Inc. Some rights reserved. Indicators from Credit Report Types of Financial Relationships Payment Behavior Debt Total Debt Debt to Credit Ratio Use of Credit Cards Access: Credit Score Possible Other: Asset Purchase and Maintenance (home, vehicle), Interest Rates © 2008 Credit Builders Alliance, Inc. Some rights reserved. NEFE Impact Hierarchy © 2008 Credit Builders Alliance, Inc. Some rights reserved. Vikki Frank Executive Director 202-730-9390 vikki@cr di b ild lli vikki@creditbuildersalliance.org www.creditbuildersalliance.org Helping Clients Build Credit Federal Reserve Bank of Boston: www.bos.frb.org/commdev/c&b/2007/fall/