Indiana Connected by 25: A Promising Model for Building Credit
Youth transitioning from foster care face many challenges, including being unable to secure an apartment or a job if they don’t have a credit profile. One innovative program, run by Indiana Connected by 25, is working to remove this barrier to success by offering young people a secured credit-building loan while in foster care.
Indiana Connected by 25 (CB25), soon to be renamed “Foster Success”, is a nonprofit organization that works with young people in and transitioning from the foster care system throughout the state of Indiana. It provides educational, financial and social support to assist foster youth ages 14 to 26 towards the goal of independence.
A participating organization in Jim Casey Youth Opportunities Initiative’s Opportunity Passport™ program, CB25’s program data shows that most foster youth in the state are “credit invisible,” meaning they have no credit history or credit score, which limits their ability to get a job or an apartment. Without parents to cosign a loan or open an account for them, the young people had limited opportunities to establish a credit profile and build their credit score. As one staff member put it, “Our kids don’t have the bank of mom and dad.”
To fill this gap, CB25 worked with the National Bank of Indianapolis, with support from an anonymous local donor, to start a credit-building loan for foster youth in Marion County, which contains Indianapolis.
Here’s how it works:
The bank issues youth a six-month loan of $300, secured by the funds from an anonymous donor, which is placed in a Certificate of Deposit. The $300 loan from the bank is placed into a checking account held by CB25. CB25 repays the loan on the young people’s behalf by making on-time monthly payments, including interest, auto-debited from the checking account. These payments are reported to the three credit bureaus. Since the loan is in the youth’s name, the on-time payments help build the young people’s credit history.
A Two-Phase Model
In January 2017, CB25 enrolled 17 youth into the credit-building loan with the aim of establishing a credit profile. After the initial six months, the youth had the option to extend their loans for another six months, which they were responsible for repaying. Seventy-six percent of the youth continued into phase two. In the second phase, CB25 partnered with Apprisen to offer financial coaching to all participating youth, both in person and by phone.
As CB25 developed the idea for a credit-building loan, staff debated internally about whether to have the youth or the organization repay the loan in phase two. Ultimately, they decided that since these youth don’t have a parent or guardian, they can be added as an authorized user to their account. The organization would help level the playing field by filling that role if the youth couldn’t pay.
CB25 offered a $300 bonus to youth who paid off their $300 loan and completed three or four financial coaching sessions over the six-month period. It also repaid missing payments to prevent youth from being negatively impacted by the credit building program, but youth were not told about this beforehand. Seventy-nine percent completed the full program and received the bonus and just two youth did not repay the loan in full.
CB25 has had three cohorts of youth participate in this credit-building program to date, for a total of 38 youth. At the end of the program, the young people were effusive with their praise, saying that it helped them learn about credit and build a credit score. They also expressed that the program should be made available to many more foster youth. Ninety percent of youth completed a survey about their experience at the end of the program, and 100 percent of survey respondents reported increased confidence in building their credit and a better understanding of how credit works.
Scaling the Model
In order to take the program statewide, CB25 needed to seek a different loan partner. It is now working with Credit Builders Alliance and Justine PETERSEN to offer the Save2Build product to youth, starting in December 2018. This will not require CB25 to provide collateral upfront but will require it to pull credit reports at the time of application. With Save2Build, youth receive a loan that it repays over a 12-month period, paying back $25 each month instead of $50 per month. The payments go into a savings account, so that youth end up with stronger credit and savings at the end of the program. CB25 will be able to track youth’s credit scores over a five-year period as part of this new partnership.
Over the past two years, CB25 has tested this model with young people, added new features (like free one-on-one financial coaching for all participants), evaluated the impact on youth and built new partnerships to bring the model to scale. We at Prosperity Now are impressed with this approach and hope that by sharing it, more organizations will pursue a similar strategy.
To read more about foster youth’s unique needs and challenges, see our brief, Starting Strong: Credit Building for Youth Transitioning from Foster Care.
We are grateful to Amy Hendrix at Indiana Connected by 25 for sharing their model with us and other organizations.