NB Financial Health
College Credit: How U.S. university students are helping the underbanked build credit in their campus communities
The credit culture is pervasive in the United States, where basic living requirements – like establishing utility accounts and purchasing a home, car, or even a cell phone – all often require credit. So it makes sense that more than 70 percent of Americans own a credit card.
In this environment, good credit is a necessary asset for entrepreneurs and average consumers alike, and a lack of good credit is a major problem – especially for those with lower incomes. “When you don’t have credit, you won’t be considered for things like business or car loans,” says Luis De La Hoz, vice president of the Lending Team at the Intersect Fund. “Also, when an immigrant arrives to the U.S., they may have a high income, but without good credit they cannot fully integrate into the country.”
Building credit through a secured loan or credit card is strongly advised for newly immigrated entrepreneurs and other first-time businesspeople. But for most of these aspiring small business owners, the application process can be intimidating and discouraging. What’s more, service providers offering credit-building loans are lacking in the U.S. — and especially those willing to lend to new citizens without credit history, or to those recovering from bankruptcy. It’s a challenge to find a credit card company, bank or other financial institution willing to serve these less desirable clients.
However, while others turn a discriminating eye to the underbanked, college students across the country are opening their doors. Take the Hilltop Microfinance Initiative (HMFI), for example. The group is one of nearly two-dozen campus microfinance institutions, or “campus MFIs” that are taking the opportunity to make an impact on their communities through microlending.
Founded by students at Georgetown University, HMFI provides accessible financial services, such as consulting and small loans, to low-income entrepreneurs in the Washington, D.C. area. In 2012, with the backing of Capital One’s Investing for Good, HMFI added the Credit Builder Program to provide underserved clients greater access to the financial system through credit building loans and financial education workshops.
According to De La Hoz, the benefit of credit-building programs like those of the Intersect Fund or HMFI is that they provide a line of credit to clients when no one else will. Further, loans purposed for building credit allow for greater social mobility for clients down the line. As HMFI’s former COO Alissa Orlando shared in a recent article, “We [realized we] could help individuals with not only lending money, but also with raising their credit scores.”
In this case, the number does make a difference — a $250,000 difference at that, which is the standard amount that a person with an above average credit score (700+) can save throughout his or her working life. In car or insurance payments alone, the potential savings range from $80 to $150 per month.
HMFI’s focus on credit-building products follows the model of larger, more established community development financial institutions such as the Capital Good Fund out of Brown University, or the Rutgers-founded Intersect Fund. Both of these groups were founded out of their universities and have since grown to become reputable lenders in the domestic microfinance industry, demonstrating that campus MFIs provide an innovative model that is not only scalable but sustainable as well.
So far, the results of HMFI’s credit-building program have been impressive. The group reports that in just six months 80 percent of its clients have increased their credit scores.
As De La Hoz says, “The cycle of poverty hurts the people who do not have a good credit score the most.” The key then is stopping the cycle before it begins—with a clean credit slate made possible in part by the elbow grease of college students.
Editor’s note: Interested undergraduates can apply to Lend for America’s 2014 fellowship by March 30, 2014.
Charity Yoro is a Program Associate at Lend for America, a non-profit platform for college students providing credit-building loans, and other microfinance products and services on university campuses nationwide.