Going to college. Buying a car. Starting a business. Owning your own home.
Often, these facets of the American Dream take a loan to achieve — and loans, in turn, require good credit. Without a favorable credit score, loan applicants will either fail to qualify or have punishingly high interest rates. Either way, financial goals stay that much further out of reach.
Mortgages and auto loans are not the only things denied to people with bad or no credit. For example, without a good score, an applicant may be unable to rent an apartment. Or, they might be unable to have a job that would let them pay the rent.
Credit Access in Marginalized Communities
Poor or “invisible” credit has harmful impacts on anyone. But, it’s probably no surprise that the problem is most acute in communities of color. This was caused by decades of unequal access to banks, discriminatory fees, and discriminatory lending practices.
Consequently, many Black and Latino consumers turn to alternative financial institutions. These may include services like payday loan stores and check-cashing businesses for when they need ready money. But, unfortunately, these often predatory lending experiences can lead to troubled credit histories.
The cause of this could be subprime lending or other impacts of systemic disadvantage. Whatever the case, the data on credit scores in marginalized communities is clear enough. One in 5 Black consumers has a FICO score below 620, compared to just 1 in 19 for white consumers. Among Latinos, the ratio is 1 in 9. A sizable proportion of Black and Latino consumers thus lack access to credit that could significantly improve their lives.
The Why, How, and Who of Financial Inclusion
Addressing these disparities is not only the right thing to do; it’s better for the economy. A 2020 CitiGroup report found that biased lending practices and other contributors to the racial wealth gap have cost the U.S. economy up to $16 trillion since 2000.
McKinsey & Company determined that if Black Americans were to reach full financial parity with white ones, the financial services industry alone would stand to make an additional $60 billion in revenue each year.
The McKinsey report is making its case for total financial inclusion of Black consumers. Their report argues that reaching this goal will require the efforts of the public-, private-, and social-sector actors. Given what they stand to gain in increased economic activity, U.S. companies definitely have a dog in this hunt.
Fortunately, some already realize that and have developed financial services that promote financial inclusion. Examples include the Walmart-Even partnership, which provides employees with early access to their paychecks. Additionally, no-fee bank accounts are offered by fintech companies like Chime.
Two individuals, in particular, have made the campaign for financial inclusion their very life’s work. These individuals are Craig Boundy, CEO of Experian North America, and José Quiñonez, founder and CEO of Mission Asset Fund.
As head of one of the nation’s three leading credit bureaus, Boundy is passionate about financial inclusion. He is also ideally positioned to address the issue of credit access in marginalized communities.
In 2019, Experian launched a free service called Experian Boost. This service allows consumers to improve their FICO scores. In addition, consumers can use this service by reporting on-time payments to utilities, cellphone companies, and streaming service providers. Using this added payment data, Experian can provide a fuller picture of a consumer’s creditworthiness.
Experian recognizes the consumers’ financial discipline that had hitherto gone uncredited. And, they can now demonstrate and use it to improve an individual’s credit score. Since its launch, Experian Boost has helped over 6 million Americans and added more than 50 million total points to FICO scores across the nation.
For José Quiñonez, helping minority and low-income consumers improve their credit scores — and their financial security — isn’t just a job; it’s “a calling.”
For the last 13 years, the 2016 MacArthur Fellowship recipient has led the nonprofit Mission Asset Fund, which seeks to provide access to non-predatory credit to people who have been excluded from mainstream financial services.
Like Experian Boost, MAF’s Lending Circles program seeks to reward good financial habits. These include the habits that marginalized consumers practice but don’t get credit for — literally or figuratively.
I recently sat down with Boundy and Quiñonez to discuss financial inclusion and how to achieve it.
Q: While some economic indicators, including the improvement of credit scores, point to a strong recovery from COVID-19, why are so many low-income communities left behind?
Craig Boundy: Historically, we’ve seen credit, wealth, and health inequities contribute to financial disparities and the underrepresentation of marginalized communities in the network of bank branches and the overarching credit economy. Unfortunately, COVID-19 perpetuated some of those disparities.
The economy has shown signs of resiliency throughout the pandemic. Yet, it’s been an uneven recovery. Many of those still struggling to find jobs come from marginalized and low-income communities. Additionally, some consumers have dealt with illness or cared for ill family and friends, setting them further back from the recovery.
The pandemic has taken a toll on the financial fabric of our economy, and we need to help these consumers get back on their feet.
José Quiñonez: During times of uncertainty, often due to job loss or other extreme circumstances, people tend to rely on loans or credit cards to bridge the gap and address basic needs. However, the challenge for many low-income families is they simply lack access to credit and other financial resources that are proportional to their needs or even their credit risk. It significantly differs from the opportunity afforded to different consumer groups.
Many people from low-income communities are credit invisible, meaning they don’t have a credit profile. Those who are active participants in the credit economy, tend to have limited credit histories. That means these individuals end up paying higher interest and fees, creating a deeper financial hole to climb out of.
Q: Why is financial inclusion so important?
Boundy: Access to credit and other financial resources is necessary for consumers to accomplish some of their primary goals, whether that’s renting an apartment, buying a house, securing a credit card, or purchasing a car.
The Experian approach is undergirded by the firm belief that access to credit should be offered relatively and in an affordable manner. As a result, our track record for helping people from diverse backgrounds improve their financial status is that we are now considered the “Consumer’s Bureau.”
We continually find new ways to help consumers with little-to-no credit history, gain access to financial resources and improve their financial health.
Quiñonez: Far too many people live in the financial shadows, meaning they don’t have access to the same financial resources as the general population, nor are they recognized by the mainstream credit economy. Simply put, they’re credit invisible or have thin files.
Without access to fair and affordable credit, these individuals become subjected to high-cost predatory lenders, who dig them deeper into a financial hole of debt.
Q: How do we break down some of those barriers and achieve more equitable access to credit and other financial resources?
Boundy: Perhaps the most significant barrier for more equitable access to credit and other financial resources is that many consumers are credit invisible or have limited credit histories. Unfortunately, you need to have credit to get credit, and the system leaves out far too many consumers.
The solution to the challenge is more data that can help predict creditworthiness. We’ve long supported the use of new data sources to augment and enhance current credit history information. This, in turn, allows lenders to effectively assess consumer’s financial situation. For example, Experian has been a pioneer in using rental, utilities, and telecom payment data to help broaden credit access for more consumers.
A little more than two years ago, we launched Experian Boost. This enabled consumers to add positive utilities, telecom, and streaming service payment history directly into their Experian credit file. To date, more than 6 million consumers across the U.S. have used Experian Boost. And, they have added over 50 million cumulative points to their FICO Scores.
Quiñonez’s take on how we can break down those barriers and achieve more equitable access to credit and other financial resources:
Quiñonez: Some have suggested overhauling the credit system to open up more equitable access to credit, but I don’t think we need to be that extreme. Many people from low-income communities are already exhibiting positive financial behavior; they just don’t get credit for it. So, rather than tear down and rebuild an entire system, we just need to acknowledge the existing financial strengths.
For instance, Mission Asset Fund created a program called Lending Circles. This program was based on the concept of friends and family lending and borrowing money from each other.
It’s a common practice across cultures. So, we were excited to bring that practice out of the shadows and create a process that enables participants to build credit. [NOTE: The Lending Circles program reports borrowers’ repayment of its no-interest, no-fee loans to all three major credit bureaus.] So far, 90% of the participants without a credit score were able to establish one. And, the average credit score grew 168 points.
We need to paint a complete picture of people’s financial lives. Bringing more predictable data into underwriting systems helps consumers establish a baseline credit profile. In turn, this opens the door for economic opportunity and is another step toward building generational wealth.
Q: Beyond incorporating more data into the system, what more can we do to ensure consumers, particularly those in marginalized and low-income communities, have access to financial resources and credit education?
Boundy: Experian is committed to pushing for expanded data sources to drive financial inclusion. We’re equally committed to empowering marginalized communities through consumer credit education and best practices.
We believe in helping underserved communities better understand the credit ecosystem. And, we believe that equipping them with the tools and knowledge to improve their credit standing is crucial to a healthier financial life.
Quiñonez: There’s little question around the role that credit and financial education play; however, there’s a misconception that basic credit education will adequately address any concerns. People have varying levels of financial knowledge and experience and enter the credit lifecycle at different stages. Therefore, we need to make sure there’s a continuum of credit education. That way, regardless of a person’s situation, they’ll have the tools and resources to navigate it effectively.