THE POWER OF CREDIT BUILDING

Credit building StrategieS for funderS

the Power of

Credit building

Funding for this publication was generously

provided by the Citi Foundation

publication author

Sarah Chenven

Director, Programs and Strategic Initiatives

credit builders alliance (cba)

CBA is a nonprofit organization creating 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.

creditbuildersalliance.org

assetfunders.org

A good credit history is crucial in today’s economy. Far more

than just a number, a good credit score is a prerequisite for

every day ﬁnancial services like a low-cost credit card, a bank

account or car loan. A good credit history can make the differ-

ence in accessing the affordable lending products necessary

to go to college, buy a home, or start and grow a small busi-

ness. Renting an apartment, paying for car insurance, signing

up for utilities and even landing a job can also be affected by a

person’s credit history – or the absence of one.

For many low-income individuals with no or “thin credit ﬁles”

, the

ability to establish a good credit history is hampered by lack of ac-

cess to affordable mainstream credit building ﬁnancial products.

Individuals with poor or thin credit often rely on payday loans to meet

their credit needs. The high-cost of these loans, combined with the

fact that on-time payments are not reported to the credit bureaus,

prevent people from building credit and other assets, often across

generations.

Without a strong credit history it is difﬁcult, if not impossible, for

households to get and stay ahead.

Growing numbers of grantmakers recognize the importance of credit

building and its ability to improve the outcomes they seek for indi-

viduals and families. Their support has been critical to the emergence

of credit building as a distinct, yet essential, component of programs

designed to achieve economic mobility and security. However the

need far outpaces the current funding base. Recruiting additional

funders committed to credit building as a stepping stone to ﬁnancial

health and wellbeing is imperative.

The Power of Credit Building: Strategies for Funders provides grant-

makers with an understanding of how credit building works and

why it is important. It offers evidence of how credit building inte-

grated across sectors directly improves opportunities for individuals,

families and small businesses struggling to thrive and provides

recommendations for grantmakers interested in incorporating credit

building into their funding strategies.

CREDIT BUILDING

IMPROVES

the outcomes

grantmakers seek.

faCtS

64 MILLION U.S. CONSUMERS

have insufﬁcient or no

credit history.

MORE THAN HALF (56%)

OF U.S. CONSUMERS HAVE

LOW CREDIT SCORES,

ranging from 500-649.

PEOPLE WITH LOW OR

NO CREDIT SCORES may

pay $200,000 more over a

lifetime for ﬁnancial products

and services than those with

good scores.

THE AVERAGE CREDIT SCORE

of a Millennial in 2013 was

628, positioning them at the

tipping point between higher

cost and more affordable

credit products.

assetfunders.org

what iS “good”? *

what iS Credit building?

Credit building is a powerful tool that helps individuals

and small businesses take control of their ﬁnancial lives

and leads to asset building. It is the act of making on-

time monthly payments on a ﬁnancial product such as an

installment loan or a credit card that is reported by the

creditor to the major credit bureaus. Responsible credit

building pairs reporting payments to the credit bureaus

with relevant and timely credit education; opening and

successfully managing ﬁnancial products is key to build-

ing and maintaining a good credit history.

The term “credit building” is often confused with “credit

repair.” Credit building is the only way someone with no

or a thin credit proﬁle is able to establish or reestablish

a credit score. It is often an effective and faster ﬁrst step

for those with poor credit proﬁles who wish to boost their

credit scores. Typically credit repair focuses on reducing

current debt loads and paying off historical accounts in

collections. Comprehensive credit building programming

CREDIT BUILDING IS A

POWERFUL TOOL

to help

individuals and small

businesses take control

of their ﬁnancial lives.

range fiCo SCore

ConSumer imPaCt

Sub-Prime

(Poor/low)

under 620 no aCCeSS or unfavorable rateS and termS

Prime

(fair/good)

620 – 780 reaSonable or good rateS and termS

SuPer Prime

(exCellent)

780+ better or beSt rateS and termS

may encompass credit repair as a complimentary and

essential component to resolve errors or deal with debt.

In just six months, on-time payments reported to the

credit bureaus on an installment loan as small as $100

can help an individual with a low credit score increase

his or her score by an average of 35 points and move an

individual with no credit score to a prime credit score.

Building credit with a credit card may afford households

with even greater beneﬁts. If the balance can be paid off

in full at the end of each month, savvy credit card users

have access to an interest free loan for up to 30 days.

And a revolving credit account in good standing stays

on a credit report indeﬁnitely. For low-income families,

this can be a powerful tool not only for credit building,

but for smoothing income ﬂuctuations or weathering

ﬁnancial emergencies.

*LENDER THRESHOLDS VARY

assetfunders.org

Credit building PromoteS

finanCial CaPability

A $300 car repair may mean that a single mother

cannot get her children to daycare or herself to

work on time. This quickly results in lost wages

and potential unemployment. When she takes out

a payday loan to ﬁx the car or pay late bills, she is

pushed into an unsustainable cycle of debt, often

paying two or three times the amount of the origi-

nal loan in fees alone before it is fully repaid. This

exacerbates her family’s ﬁnancial instability and

creates overwhelming psychological and physical

stress. In contrast, the same single mother can

weather this short-term ﬁnancial setback to her

long-term advantage with access to a credit card

with a reasonable interest rate. She could repay

that $300 as her cash ﬂow permits, paying the full

balance or even the minimum monthly payment

on time. If managed well, she will save hundreds

of dollars in interest while also building her credit.

Seeing the impact of her ﬁnancial decisions re-

ﬂected on her credit report and the corresponding

increase to her credit score is empowering and re-

inforces her resolve to prioritize her positive pay-

ment behavior in pursuit of future goals.

CREDIT BUILDING REQUIRES

the existence of at least one

positive trade line — or credit

account — on an individual’s

credit report.

Credit building ProduCtS

Credit building requires the existence of at least one positive

trade line — or credit account — on an individual’s credit report.

To build credit, that credit account must be both open and active.

Lenders report both installment (e.g. car loans, student loans,

mortgages, etc.) and revolving (e.g. credit cards or lines of cred-

it) credit to the credit bureaus. In order to build credit, install-

ment loans must carry a balance and require a monthly pay-

ment. While paying off debt is a good thing, once paid in full

a loan is no longer active and will not continue to build credit.

Revolving credit, on the other hand, offers an indeﬁnite cred-

it building solution as long as it is actively used; at least once

every six months and ideally monthly. An outstanding balance

on the credit card is not required to build credit.

“Credit Builder” loans and secured credit cards are valuable

stepping stones to mainstream ﬁnancial products for those

seeking to establish or rehabilitate their credit histories and im-

prove their scores – and are often considered less risky by lend-

ers. More and more nonproﬁt lenders and credit unions offer

small-dollar Credit Builder loans that are “secured” by the loan

proceeds themselves and released to the borrower upon repay-

ment. In the case of a secured credit card, which may also be

offered by a credit union or a bank, individuals deposit funds in

a bank account as collateral.

In addition to traditional ﬁnancial products, alternative forms of

positive “credit data”, such as utility and telecom payments, re-

ported to the credit bureaus help individuals and entrepreneurs

build credit. Research indicates that adding this data enables

74% of those with no or thin credit ﬁles to obtain credit scores,

notably impacting Latinos, African Americans, youth between

18 and 25, and seniors.

Furnished to the credit bureaus respon-

sibly, alternative credit data reporting offers millions of Ameri-

cans the chance to build credit without taking on additional debt

or incurring the burden — and risk of not being able to pay — an

additional monthly expense.

assetfunders.org

Credit rePort and SCore:

Key toolS for meaSuring SuCCeSS

While a newly established or improved credit score is

the most simple metric by which to measure credit build-

ing success, a credit report is a more comprehensive

tool that provides valuable insight into one’s ﬁnancial

history, knowledge and behavior. It is a unique, longitu-

dinal instrument for objectively measuring key ﬁnancial

indicators beyond just the credit score.

For those with credit histories, credit reports are excellent

tools for understanding a person’s historical credit pay-

ment patterns, including whether they have resulted in

civil judgments or bankruptcy. They also reﬂect which ﬁ-

nancial institutions and ﬁnancial products individuals cur-

rently rely on and why (e.g. a car loan offered by a local

credit union), and help inform critical budget decisions

based on existing debt obligations.

If a person has no credit history or a thin ﬁle with no active

credit accounts in good standing, the lack of information

on a credit report is an equally powerful cue. It provides

practitioners with the perfect opportunity to introduce

credit building and leverage ongoing credit building suc-

cess to help clients track their progress along the path to

greater ﬁnancial stability and security in real-time. As in-

dividuals begin to build credit, credit reports reviewed at

regular intervals offer a series of teachable moments that

can motivate individuals to continue to improve ﬁnancial

behavior and achieve asset building goals.

the Power of Credit: benefitS

to individualS and familieS

In today’s economy, a good credit history is a ﬁnancial as-

set. Distinct from debt – which is a liability deﬁned by what

we owe – credit is a measure of our ﬁnancial health and

increasingly inﬂuences lenders and others on who they

decide to do business with and under what terms and con-

ditions. Having good credit beneﬁts individuals and their

families in the following ways:

inCreaSeS CaSh flow and

CreateS oPPortunitieS to Save

A good credit score can save a person thousands of dol-

lars over a lifetime. A good credit history offers individuals

and families better loan terms and reduces or eliminates

costly deposits for goods and services, resulting in a sus-

tainable and systematic way to save money.

For example,

an individual with a FICO score of:

720 will pay $4,020 less for a $10,000, 5-year auto loan

– saving $67 a month – compared to someone with a

score of 500.

760 will pay $69,280 less for a $100,000, 30-year mort-

gage – saving $192 a month – compared to someone

with a score of 620.

over 95% of nonProfitS Surveyed

agree that Credit rePortS:

Are a valuable tool for understanding and

addressing a client’s credit proﬁle, challenges,

and opportunities;

Improve the ability to measure and track a

client’s credit and ﬁnancial progress over time;

Engage client participation in a tangible way

that leads to improved credit and other ﬁnancial

assets.

CREDIT IS A MEASURE

of one’s ﬁnancial health

and increasingly inﬂuences

lenders and others on who

they decide to do business

with and under what terms

and conditions.

assetfunders.org

A GOOD CREDIT HISTORY

offers individuals and families

better loan terms and reduces

or eliminates costly deposits

for goods and services.

imProveS emPloyment

and houSing oPtionS

Most people require some minimum level of stability – a

place to live and an income – before they can begin to

sustainably build assets. Credit building is critical in suc-

cessfully laying that groundwork.

An estimated 1 in 4 unemployed Americans are re-

quired to go through a credit check when applying for

a job with 1 in 10 denied a job due to negative informa-

tion on their credit report.

Many landlords check prospective tenants’ credit re-

port for previous housing collections items and other

indicators of how responsible the applicant is at man-

aging money. Those with good credit histories there-

fore have more – and often better – rental options.

bufferS eConomiC ShoCKS

and SmoothS inCome

Many American households, particularly those that are

low-income, require credit to weather economic shocks

such as unexpected expenses, a sudden job loss or to

stretch and smooth income to meet their basic needs.

Consumers without a good credit history may have to

turn to high-cost payday lenders to obtain credit.

5.5% of adults nationwide have used payday loans

in the past ﬁve years, spending approximately $7.4

billion annually to meet their small dollar, short-term

credit needs.

Many consumers rely on payday loans to cover ordi-

nary living expenses – not just emergency situations

— on a regular basis throughout the year.

imProveS aCCeSS to

high-Quality Credit ProduCtS

While a good credit history and score can mean lower

fees and interest, a thin credit history — or none at all

— can make it difﬁcult to qualify for high-quality, more af-

fordable credit products from traditional lenders to meet

short-term ﬁnancial needs or take advantage of opportu-

nities to build assets by purchasing a home, earning a

college degree or starting a business.

In 2009 Fannie Mae raised its minimum credit score for

conventional loans from 580 to 620. Even with a 20%

down payment, a mortgage applicant can be rejected

with a score below 620.

Many students rely on private loans to support or sup-

plement their education. It is difﬁcult to obtain a pri-

vate student loan with a FICO score below 650.

exPandS oPPortunitieS

for Small buSineSS growth

Small business ownership offers a vital pathway to

asset building.

Lenders generally require a personal credit history,

and sometimes a business credit history, before ap-

proving a small business loan.

The number of nonproﬁt microenterprise and small

business lenders reporting their underserved borrow-

ers’ loans to the credit bureaus in order to help them

build credit and access mainstream credit products

almost doubled between 2008 and 2011.

assetfunders.org

INTEGRATING CREDIT

BUILDING STRATEGIES

into

existing programs creates

better outcomes for low-

income consumers.

funderS turn to Credit

building to get reSultS

Growing numbers of grantmakers and their nonproﬁt

partners recognize that integrating credit building strat-

egies into existing programs and services creates bet-

ter outcomes – especially among low-income consum-

ers. For example, a recent survey of nonproﬁt lenders

revealed that over 95% agree that reporting their bor-

rowers’ loans to the credit bureaus improves their clients’

credit scores and increases their access to safe and af-

fordable mainstream credit products. Nonproﬁts also

note that reporting strengthens the quality of their loan

portfolios by providing clients with an additional positive

incentive to make their payments on-time.

Grantmakers committed to credit building programs are

demonstrating that access to responsible credit products,

combined with ﬁnancial education, helps level the play-

ing ﬁeld and makes long-term asset goals more attain-

able for all Americans. Some early investors in this work

include the Citi Foundation, Annie E. Casey Foundation,

Bank of America Foundation, CapitalOne Foundation,

Charles Stewart Mott Foundation, Experian, Ford Foun-

dation, JPMorgan Chase, Levi Strauss Foundation, The

MacArthur Foundation, MetLife Foundation, and the W.K.

Kellogg Foundation. However, more funding in this area

is required. The following are examples of how founda-

tions are investing in credit building across sectors to

help strengthen outcomes for individuals and families.

JobS are not enough

Getting a job is a major ﬁrst step towards achieving ﬁnan-

cial stability. But for many low-income workers, wages

alone do not cover basic living expenses such as rent,

utilities, daycare and even food. Making the link between

ﬁnancial stability and good credit, the Local Initiatives

Support Corporation (LISC) in Chicago added a credit

building product to their network of Financial Opportu-

nity Centers (FOCs) in 2010 with funding from numerous

national and local foundations. In addition to employ-

ment, ﬁnancial and income support services, the FOCs

now offer a credit building loan paired with a matched

savings account, called Twin Accounts.

Participants in Twin Accounts are issued a 12-month, $300

loan, the proceeds of which are immediately transferred

into a “locked” savings account where they remain until

the loan is paid off. To incentivize the most important ele-

ment of credit building, LISC Chicago matches each loan

payment – dollar for dollar – as long as the payment gets

to the lender on time. Twin Accounts costs no more than

an IDA program, with funding covering ﬁnancial coun-

selor salaries, counselor training on credit building, and

match funds for Twin Accounts customers.

Successful participants end the 12-month program with

$300 in savings, and up to $300 in match. Within six

months participants who are “unscored” at program en-

try typically generate FICO scores in the high 600s. Those

with low scores at program entry see an average increase

of 30-60 points. To date, 63% of all Twin Accounts par-

ticipants have made ALL of their payments on time, and

83% have successfully paid off the loan (and therefore

saved $300) in 12 months. More importantly, Twin Ac-

counts participants are using improved credit scores to

get better jobs, move to higher quality apartments, and

decrease expenses through use of better-priced ﬁnancial

products and services.

assetfunders.org

GRANTMAKERS COMMITTED TO

CREDIT BUILDING

demonstrate

that access to responsible

credit products makes

long-term asset goals more

attainable for all Americans.

miCroenterPriSe and

Small buSineSS develoPment

Self-employment or small business development is an

important asset building option for many Americans, par-

ticularly as the availability of living-wage jobs have dwin-

dled over the years.

Nonproﬁt microlenders increasingly

see the negative effects of low or no credit scores on the

entrepreneurs they serve as they struggle to obtain loans

to start or grow their businesses.

These lenders act as a

credit – and credit building – bridge between those entre-

preneurs and traditional ﬁnancial institutions.

Based in St. Louis, Missouri, Justine PETERSEN (JP) has

been offering microenterprise development, home own-

ership services, and ﬁnancial coaching to low- to mod-

erate-income individuals since 1997. With support from

Citi, Bank of America and others, JP is a credit building

pioneer — simultaneously offering credit building as a

standalone opportunity and integrating it strategically

into its asset building efforts.

Success at JP is multifaceted. On average, clients with

no credit score reach 680 and those with low scores see

a 50 point increase in six months. Entrepreneurs in par-

ticular leverage improved credit to start and grow their

businesses through better rates and terms with suppli-

ers and landlords, and ultimately access to mainstream

small business loans leading to increased income and

net worth.

JP also uses its deep experience in the credit building

ﬁeld to support other nonproﬁts and practitioners work-

ing to help their clients build credit.

eConomiC JuStiCe for

domeStiC violenCe SurvivorS

Women who experience domestic violence must often

rebuild their ﬁnancial lives. Establishing or rebuilding

their credit is a critical milestone on that journey to-

ward independence. To address the ﬁnancial needs of

survivors, the Allstate Foundation offers grants to state

and local domestic violence coalitions to provide ﬁnan-

cial education, job readiness and training, individual

development accounts (IDA) and microloans. A num-

ber of domestic violence groups have creatively lever-

aged these activities by incorporating credit building to

improve outcomes.

Since 2009, the Kentucky Domestic Violence Associa-

tion’s (KDVA) Economic Justice Project provides services

and programs that work with survivors to help them gain

economic self-sufﬁciency. One way they do this is by of-

fering no-interest microloans to their IDA participants.

The loans, which are secured with the borrower’s IDA

savings, are designed to assist survivors in meeting im-

mediate needs while building positive credit.

Survivors participating in the program leverage increased

credit scores (many by 50 to 100 points) and IDA savings

to obtain mainstream ﬁnancial products such as afford-

able car loans, small business loans or home mortgages

needed to reestablish their lives.

Setting the Stage for youth

Many young people transition to adulthood without hav-

ing learned the importance of a good credit history or

how to build one. They discover this when they apply for

– and are denied – a job, apartment, cell phone service,

bank account, car or student loan. For those who are able

assetfunders.org

EMBEDDING CREDIT BUILDING

into social service, workforce

development, health and

education programs, helps

effect positive behavior change.

to access ﬁnancial products, many may not understand

the consequences of late payments or overspending on

their emerging credit reports and scores.

Mission SF Community Financial Center (Mission SF) — a

San Francisco-based nonproﬁt – works to position youth

and young adults to take control of their ﬁnances. Using

their “Pathways” model, Mission SF ﬁnancial counselors

have engaged hundreds of young adults on community

college campuses and in workforce settings – referring

them to a local credit union partner to open bank accounts,

access loans that help build credit, and take other steps

towards ﬁnancial security. Program participants not only

establish scores in the high 600s or move from subprime

to prime in just six months, they are able to save money,

secure housing, access employment, and go to school.

Last fall, Mission SF was one of only three sites across the

country awarded a grant through the Financial Capability

Partnership Initiative funded by the Kresge Foundation

through the National Federation of Community Develop-

ment Credit Unions and the Center for Financial Services

Innovation. With this funding Mission SF is piloting “MY

Path to Credit,” a model that integrates a credit build-

ing loan product paired with one-on-one coaching into

a workforce site for youth ages 18-24. With over 60% of

participants lacking any credit history at all, MY Path to

Credit will position them to move into their own apart-

ments, get jobs, and further their educations.

from Payday to mainStream

Many low-income people with no, thin or poor credit his-

tories lack the savings, a social safety net or other assets

to weather ﬁnancial shocks or smooth income without

relying on predatory lenders. With grant funding to cover

startup costs and a Program Related Investment (PRI) of

loan capital from the Meyer Memorial Trust, Innovative

Changes (IC$) opened its doors in 2010 to provide small-

dollar, short-term consumer loans, ﬁnancial education

and credit building programs as a responsible alternative

in Oregon.

IC$’s loans are combined with ﬁnancial education to help

clients, 70% of whom are low-income women and mostly

single heads of households, set the stage for ﬁnancial sta-

bility. In addition to building credit, IC$ loans help people

better align income with expenses, catch up on past bills

and taxes, cover housing and medical needs, pay off high-

er-cost debt and more.

Within six months borrowers on average, establish a prime

score of 670 or increase an existing low score by 42 points,

which can move them from subprime to prime. As a result,

IC$ has been able to help clients reﬁnance car loan interest

rates, qualify for affordable mortgages and graduate into

low-interest credit cards and new bank accounts through

partnerships with local ﬁnancial institutions.

innovationS in alternative

Credit data rePorting

Currently, many companies and landlords report poor

payment history to the credit bureaus through the collec-

tion process. Far fewer, however, reward positive payment

behavior by reporting on-time payments. This can lead to

a negatively skewed assessment of the credit risk posed

by many individuals and entrepreneurs, particularly those

with low- and modest-incomes who lack other viable op-

portunities to build credit.

assetfunders.org

GOOD CREDIT MEANS

greater financial stability,

savings and asset building

opportunities.

As affordable housing providers (AHPs) across the coun-

try increasingly embrace asset building as a strategy to

improve their residents’ outcomes, several are exploring

a new and innovative model of credit building by report-

ing rental payments. A 2013 survey of more than 300 af-

fordable housing residents revealed that 96% understand

the importance of good credit and 97% believe that hav-

ing their rental payments reported is a good way to build

their credit.

Over the last two years, the Citi Foundation and Credit

Builders Alliance (CBA), a national nonproﬁt network of

almost 400 community based organizations engaged in

credit building, have catalyzed interest in and laid the

foundation for rent reporting as a valuable and viable

credit building opportunity for residents of nonproﬁt and

public AHPs. In 2014 CBA is implementing its Power of

Rent Reporting Pilot with eight AHPs. Each AHP is commit-

ted to leveraging the rent reporting opportunity as a ﬁnan-

cial capability tool for their tenants by pairing it with credit

education then measuring and documenting the results.

integrating into the finanCial mainStream

Those excluded from America’s economic system have

limited prospects. Peer lending circles have long been an

informal way for family, friends and neighbors – particu-

larly in immigrant communities – to help each other gain

access to capital they otherwise could not get from tra-

ditional ﬁnancial sources. Through its social loan model,

Mission Asset Fund (MAF) has formalized peer lending

circles to help ﬁnancially excluded communities meet

short term credit needs and build credit while also be-

coming visible, active, and successful participants in the

U.S. ﬁnancial mainstream.

Based in San Francisco, MAF has received support from

numerous grantmakers across the country. On average,

lending circle participants leverage the funds and support

they receive to increase their credit scores by 168 points

and to reduce their debt burdens by over $1000. Many go

on to start small businesses, purchase homes, open bank

accounts and even become American citizens.

Being poor isn’t the entire proBlem. it’s having Bad

- or no - credit. many low-income people are good

money managers - they just don’t have the financial

products that report to credit agencies.”

— Ricki Lowitz, Director,

economic opportunities, Lisc chicago

assetfunders.org

Credit building

reCommendationS for funderS

Successful credit building depends in large part on the

support of grantmakers to invest in best practices, im-

proved outcomes and innovative opportunities. The fol-

lowing strategies are recommended to grantmakers in

advancing their funding goals through credit building:

build organizational and Staff CaPaCity.

Reporting loan repayment behavior to the credit bu-

reaus and pulling credit reports as a ﬁnancial coaching

tool requires speciﬁc knowledge, skills, and technology.

Investments in staff training, skills-building, and appro-

priate reporting technology as well as underwriting the

costs associated with reporting loan data and pulling

credit reports from the credit bureaus are all necessary

elements in ensuring sustainable, compliant, and effec-

tive credit building efforts.

exPand Credit building aCroSS SeCtorS.

Embedding credit building beyond traditional asset

building programming into social service, workforce

development, health and education programs can help

effect positive behavior change. Funders can encourage

their grantees to incorporate credit building into their

work and nurture its integration by including credit

building as a fundable activity in their guidelines and

embedding credit building metrics such as improved

credit score, access to affordable mainstream ﬁnancial

products, savings, and decreased ﬁnancial stress into

grant outcomes.

Promote Collaboration. As credit building gains

more and more traction, funders can play an important

role in supporting and encouraging smart community-

based collaboration by funding activities and seeking

outcomes that involve: 1) Cross referrals for nonproﬁts

to join forces to help clients by bringing together their

respective areas of expertise and 2) Relationship build-

ing between nonproﬁts and mainstream ﬁnancial insti-

tutions. While many practitioners in the growing and

diverse credit building ranks are lenders who can lever-

age their own ﬁnancial products by reporting directly to

the credit bureaus, many more rely on outside partners

to facilitate access to credit for their clients. In some

cases, nonproﬁts do both to maximize impact and en-

sure sustainable credit building beyond the timeframe

of a speciﬁc intervention.

nurture Peer learning. Professional peer learn-

ing is critical to the further development of the credit

building ﬁeld. By supporting practitioner Credit Build-

ing Learning Communities at the national or commu-

nity level, grantmakers can help foster an environment

of commitment to continual improvement of services

and replication of best practices.

foSter Knowledge and innovation.

The credit reporting industry has changed dramatically

over the past 10 years, with more changes likely in the

next decade. Investments in research and pilots of dif-

ferent credit reporting, education products and models

is important to ensure those who need it most, beneﬁt

from these changes.

SuPPort evaluation.

Many nonproﬁts struggle to

develop objective, reliable measures and data on the

outcomes associated with ﬁnancial education and lend-

ing. Investing in the development of standardized cred-

it building outcomes beyond credit scores and impact

indicators will help ensure successful programs, both

for clients and nonproﬁts

. Funding for more rigorous

evaluation is essential to fully understand the long-term

implications and impact of credit building on people’s

ﬁnancial health and upward mobility.

exPlore PoliCy oPPortunitieS. Funders’ support

of credit building policies and emerging innovations in

the ﬁeld, such as rental payment reporting, will better

ensure that low- and moderate-income individuals and

entrepreneurs are able to successfully participate in the

modern credit system.

credit is the passport

to the new economy.”

— AndReA LeveRe, presiDent,

cFeD, Washington, D.c.

assetfunders.org

ConCluSion

A good credit history is not only an asset, it is the means to greater and more

sustainable ﬁnancial stability, savings and asset building opportunities.

As credit reports and scores are used more widely by creditors, employers

and other businesses, grantmakers are recognizing the connection between

consumers’ credit proﬁles and the opportunities available to them. Over the

last ﬁve years the nonproﬁt community has begun to embrace credit building

as integral to helping low- and moderate-income and other underserved con-

stituents build and sustain ﬁnancial assets.

Funders and practitioners must continue to leverage their resources to sup-

port responsible credit building programs and policies that combine access

to safe, affordable ﬁnancial products with skilled and relevant ﬁnancial edu-

cation. In this way, they create ideal conditions for individuals and families to

build credit and assets.

GRANTMAKERS RECOGNIZE

that credit building is integral

to putting individuals on a

path of economic mobility

and security.

assetfunders.org

Credit. The ability of a customer to obtain goods or services

before payment, based on the trust that payment will be made

in the future.

Credit builder loan. A loan that helps build/establish

a credit history; generally, these loans are small, help build

credit relationships with community lenders, are reported to

the credit bureaus, and replace asset-stripping/costly alterna-

tives (i.e. payday loans).

Credit building. The act of making on-time monthly pay-

ments on a ﬁnancial product such as an installment loan or a

credit card that is reported by the creditor to the major credit

bureaus.

Credit bureau. A credit-reporting agency that is a clearing-

house for information on the credit rating of individuals or

ﬁrms – often called a consumer reporting agency. The three

largest credit bureaus in the U.S. are Equifax, Experian, and

TransUnion.

Credit hiStory. A record of transactions involving the use

of credit. If you do not have a credit history you will not have

a credit report

Credit rePair. Traditionally, counseling focused on develop-

ing debt management plans.

Credit rePort. A record of a consumer’s credit history.

Credit SCore. A number that summarizes your credit risk. It

generally is used by lenders to assess the odds that you will

become delinquent in repaying your debt within the next two

years, and is based on a snapshot of your credit report at a

particular point in time.

Credit tyPe. Refers to the type of credit agreement made

with a creditor; for example, a revolving account or install-

ment loan.

fiCo SCore. FICO is an acronym for the Fair Isaac Corpora-

tion, the creators of the FICO score. The FICO score range is

between 300 and 850. In general, a FICO score above 650 in-

dicates that the individual has a very good credit history. In-

dividuals with scores below 620 may ﬁnd it more difﬁcult to

obtain ﬁnancing at a favorable rate.

individual develoPment aCCount (ida). A savings

account for lower income individuals where savings are

matched by private or public funds; they are typically used for

a speciﬁc purpose such as education, purchasing a ﬁrst home,

or starting a business.

inStallment Credit. A credit account in which the debt is

divided into amounts to be paid successively at speciﬁed in-

tervals.

line of Credit. An arrangement between a ﬁnancial institu-

tion, usually between a bank and a customer, that establishes

a maximum loan balance that the bank will permit the bor-

rower to maintain. The borrower can draw down on the line

of credit at any time, as long as he or she does not exceed the

maximum set in the agreement.

miCroenterPriSe. A small business that employs a small

number of employees. A microenterprise will usually operate

with fewer than 5 people and is started with a small amount of

capital. Most microenterprises specialize in providing goods

or services for their local areas.

Payday loan. A short-term loan borrowed at a very high rate

of interest against the borrower’s next paycheck. These loans

are also called cash advance loans or check advance loans.

Predatory lending. Unscrupulous actions carried out by a

lender to entice, induce and/or assist a borrower in taking a

loan that carries high fees, a high interest rate, strips the bor-

rower of equity, or places the borrower in a lower credit rated

loan to the beneﬁt of the lender.

revolving aCCount or revolving line of Credit. Credit

that is available up to a predetermined maximum limit so long

as a customer makes regular payments.

SeCured Credit Card. An alternative to a credit card, the

secured card requires a cash deposit which becomes the un-

secured credit line for that account. Funds are “secured” in a

savings account to be used for payment in case you are un-

able to make your payment. Typically, the credit limit is gener-

ally the amount in the savings account and most range from

$300-$1,000. For example, if you place $500 in your account,

you will have a $500 credit limit.

SeCured ConSumer loan. a loan in which the borrower

pledges some asset (e.g. a car or property) as collateral for

the loan.

SubPrime Credit. General term for borrowers of subprime

debt, or loans made to people with less-than-perfect credit

or short credit histories. Subprime credit includes the origi-

nal borrowing itself, as well as any derivative products such

as securitizations that are based on subprime loans and then

sold to investors in the secondary markets.

trade line. An account listed on a credit report. Each sepa-

rate account is a different trade line. A trade line describes

the consumer’s account status and activity. Trade line infor-

mation includes names of companies where the applicant has

accounts, dates accounts were opened, credit limits, types of

accounts, balances owed and payment histories.

unSeCured Credit. A loan that is issued and supported only

by the borrower’s creditworthiness, rather than by some sort

of collateral; unsecured credit loans are sometimes called

signature loans.

Key Credit building termS

assetfunders.org

1 Individuals with no credit history will not be able to generate a

credit report or a credit score. An individual with a “thin credit ﬁle”

will have a credit report but may not be able to generate a credit

score due to insufﬁcient credit history or not enough credit accounts.

In both cases individuals are seen as credit risky and inexperienced

with managing credit because they have a limited credit history.

2 Experian Information Solutions.

3 Brooks, J., Wiedrich, K., Sims, Jr., L., & Medina, J. Treading Water

in the Deep End, Findings from the 2014 Assets and Opportunities

Scorecard (CFED, January 2014). Different credit reporting agencies

use different credit scores, which may use slightly different credit

score scales. In all cases the higher the score the better. The credit

score source for this data point is TransUnion’s TransRisk score,

which ranges from 300-850.

4 Liz Weston, “Lifetime Cost of Bad Credit: $201,712.” MSN Money,

October 13, 2011, http://money.msn.com/credit-rating/lifetime-cost-

of-bad-credit-201712-dollars-weston.aspx?page=0.

5 Experian National Score Index, 2013 (http://www.experian.com/

live-credit-smart/state-of-credit-2013.html). The credit score source

for this data point is the VantageScore 3.0, which ranges from

300-850.

6 CBA Member Survey, July 2013.

7 FICO scores are the most widely known and used and range from

300-850. Different lenders and businesses assign different under-

writing score ﬂoors to determine what is considered subprime, prime

or super-prime.

8 The best practice in credit building is to maintain three active credit

accounts (ideally a mix of installment and revolving credit), making

on-time payments on those accounts every month for at least six

months.

9 Policy and Economic Research Council and the Brookings Institu-

tion, Give Credit Where Credit is Due: Increasing Access to Afford-

able Mainstream Credit (2006).

10 In June 2013, Congressmen Mike Fitzpatrick and Keith Ellison

introduced the bipartisan Credit Access and Inclusion Act [HR 2538],

still pending in the House, that would allow landlords and utility and

telecom companies to report all on-time payment data to credit

reporting agencies.

11 CBA Member Survey, July 2013.

12 According to the Corporation for Enterprise Development’s (CFED)

Household Financial Security Framework, in order to save, household

income must exceed expenses necessary to meet basic needs and

pay down debt. Like credit building, savings is a critical strategy for

all Americans and an important step along the asset building con-

tinuum, particularly for those with low- and modest incomes

(http://cfed.org/assets/pdfs/CFED_One_Pager.pdf).

13 Data derived from MyFICO.com.

14 Traub, Amy, Discredited: How Employment Credit Checks Keep

Qualiﬁed Workers out of a Job (Demos. 2013). Many employers

review credit reports as part of the job application process in an ef-

fort to assess a candidate’s stability and the likelihood that he or she

may be dishonest or commit fraud. However there is little evidence

that credit proﬁles are reliable indicators of a job applicant’s ability to

perform a job, particularly for those whose credit histories suffered

due to a medical situation or a period of prolonged unemployment.

15 http://www.tenantsunion.org/en/rights/tenant-screening.

16 http://www.homebuyinginstitute.com/news/fha-credit-require-

ments-updated-506/.

17 Private Student Loans, Report to the Senate Committee on Bank-

ing, Housing, and Urban Affairs, the Senate Committee on Health,

Education, Labor, and Pensions, the House of Representatives

Committee on Financial Services, and the House of Representatives

Committee on Education and the Workforce (Consumer Financial

Protection Bureau, August 2012). According to the CFPB, outstand-

ing private student loan debt totals approximately $150 billion.

18 Klein, J. and Fischer, L, Building Assets Through Microbusiness

(FIELD, The Aspen Institute, 2014).

19 http://www.sba.gov/community/blogs/6-step-guide-how-get-

business-loan.

20 Data from FY2008 and FY2011 U.S. Microenterprise Census,

FIELD at the Aspen Institute. In FY 2011, 207 organizations com-

pleted the Census; 122 were direct lenders.

21 Urahn, S., Plunkett, T., Bourke, N., Horowitz, A., Lake, W. &

Roche, T., Payday Lending in America: Policy Solutions (The PEW

Charitable Trusts, October 2013).

22 Urahn, S., Plunkett, T., Bourke, N., Horowitz, A., Lake, W. &

Roche, T, Payday Lending in America: Who Borrows, Where They

Borrow, and Why (The PEW Charitable Trusts, July 2012).

23 CBA Member Survey, July 2013.

24 To make sure participants can continue building credit beyond the

12-month loan term, LISC limits the use of match funds to one op-

tion: the opening of a secured credit card. LISC will soon add a sec-

ond year on to Twin Accounts – designed to support credit card use.

LISC will provide $25 per month, for each month the client brings a

statement to the FOC that shows the person 1) used the card during

the billing period, and 2) ended the term of the billing period with a

balance of 30% or less of the credit limit.

25 Klein, J. and Fischer, L, Building Assets Through Microbusiness

(FIELD, The Aspen Institute, 2014).

26 Klein, J., Gomez, L. & Edgcomb, E., Asset Building Through

Credit Pilot (FIELD, The Aspen Institute, 2013).

27 JP is the primary service provider for LISC’s Twin Accounts and

also served as the intermediary in the Asset Building through Credit

Building(ABC) Program – a collaborative initiative funded by the Citi

Foundation and facilitated by FIELD at the Aspen Institute to pilot

and measure the use of secured credit cards as a credit building tool

for low- and modest-income entrepreneurs.

28 To understand the way this 168 credit score increase total is

calculated as well as other compelling social loan impact data, see

the reports produced by San Francisco State University’s César E.

Chávez Institute detailing the impact and replication of MAF’s Lend-

ing Circles at http://missionassetfund.org/impact/program-outcomes.

29 For more information about the range and diversity of indicators

used by many nonproﬁts that offer credit building see http://credit-

buildersalliance.org/whats-new/resources/how-cba-member-organiza-

tions-are-measuring-credit-building-success.

endnoteS

ASSET FUNDERS NETWORK (AFN)

AFN provides grant makers with valuable opportunities to learn and

connect. From veteran practitioners to newcomers with fresh ideas,

AFN provides a safe and neutral forum for candid conversations among

peers with similar and opposing views. Our programming increases

the capacity of our members to more effectively promote economic

opportunity and security and make better strategic funding decisions.

Formed in 2005, AFN increases the capacity of its foundation and

grantmaker members to effectively promote economic security by

supporting efforts that help low- and moderate-income individuals

build and protect assets.

To learn more and to become involved in advancing the ﬁeld,

please visit AFN on the web at www.assetfunders.org