An Important Question for Every Relationship: "What's Your Credit Score?"
This week, as part of the first-ever Assets & Opportunity National Week of Action, we are joining with advocates nationwide to call attention to the issues of economic insecurity and inequality that too many families across this country face and highlight the successful solutions that create an opportunity economy in which everyone has the chance to get ahead. Today, we're focusing on the importance of building strong credit.
We all love the excitement of getting a notification that someone is interested in you after looking at your dating profile. You quickly check theirs, see where they live, what interests they have, what their pictures say about them. But what if you could see their credit score, too? So many relationships are fraught with money troubles, so it's understable to want to know whether your potential partner is sound financially. Dating sites are good at determining compatibility based on self-reported measures, but using a seemingly objective indicator like credit score seems like it would help make better matches--and potentially help love birds avoid some serious financial problems down the road.
But what about folks who don't have any credit history at all? There are an estimated 26 million people in the United States who are "credit invisible", meaning there is not enough information in the borrower's profile to generate a credit report or a credit score. Blacks and Hispanics are more likely than whites or Asian Americans to be credit invisible or to have unscored credit records. Millions more have "subprime" credit, meaning that they have less-than-ideal credit profiles or scores.
There was a woman who dropped by one Friday afternoon at Mission Asset Fund (MAF), the nonprofit where I work. She asked if she would be able to get money so that she could take her son out to dinner that night for his birthday. Unfortunately, MAF's social loan program does not provide the immediacy of funds that she needed. So where does someone like her go? If she does not have credit and is unable to borrow from friends and family, her only option may be to go to a payday lender that can offer her money that same day as an advance on her regular earnings with an employer. Even though payday lenders are known to charge exorbitant interest rates and fees, the tradeoff may seem worth it to her in order to have a celebratory meal with her family.
I saw so many people make this same decision at the payday loan shop that my mom managed in Indiana. The challenge was that, once someone took out a payday loan, it became very difficult for them to get rid of it. What seemed like a short-term loan ballooned into a long-term commitment. While in high school, I came back from California to visit my mom every six months, and I would see the same customers every year, again and again. They would even get my mom gifts for Christmas. The payday lender soon became the lender of choice and at times the only lender, a place where customers felt listened to and understood, but which did little to break them out of a credit-and-debt cycle so that they could truly build assets.
Many state laws protect consumers against predatory lenders, but borrowers can still access these loans online if they are not available in their neighborhood. New York has warned online lenders about its interest rates caps and rules against title lending, while other states like California have seen operations move out of state to tribal reservations in order to thwart regulations and continue business. Laws are not enough to protect consumers from accessing bad loans, as people will always need access to capital. One of the barriers to strong consumer protection is the way our country goes about credit.
It is not intuitive that a person may be dinged on their credit report for failing to pay an electricity or cable bill, while at the same time being unable to benefit from making regular on-time payments for such services--even though these often require a credit check or a sizeable deposit. Increasingly, credit has become so important that it can impact where you work and even where you live.
From finding your next great relationship to paying for a special night out, having good credit is important. My immigrant father who came to the United States from India repeatedly told me to avoid credit cards as a young adult so I would avoid the same mistakes he made. He added me as an authorized user to his AMEX charge card so I could build a credit history early on without taking on debt. I encourage you to start similar conversations with your family members and friends about credit too. You may even want to connect with one of the organizations in the A&O Network to help you realize larger financial goals. You, your relationship and your credit profile deserve to be powerful.
Mohan Kanungo is Director of Programs & Engagement at Mission Asset Fund and an A&O Network Steering Committee Member.
Want to expand access to opportunities for families to improve their credit, build assets and create a more prosperous future. Join the Assets & Opportunity Network!