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Extending Credit to Marginalized Communities

Extending Credit to Marginalized Communities
2010Fair Credit/Fair Housing

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The true test of success for an economy is not just jobs and income. It is the opportunity for all participants to save for the future and acquire assets of lasting and potentially growing value, such as post-secondary education, a home, a small business, or a well-invested retirement account. By this test, the United States is faring even worse than the normal figures on poverty suggest. While 13% of American households have incomes below the federal poverty line, 22% of them live in “asset poverty”, defined as lacking enough assets to survive three months at the poverty line if their income suddenly vanishes, due, for example to job loss or family dissolution. Fully 14.3 % of all households — and 37.2% of minority ones — live in “extreme asset poverty,” defined as having no savings or assets whatsoever.

We have learned that with the right facilitating structures, the poor can save. Yet, saving is extremely difficult if one has debts. In fact, savings and credit are linked in important ways. If one has savings, even just $500 or $1,000 in the bank, one has a cushion to deal with emergencies. On the other hand, if one has no savings, as is the case for millions of Americans, and has to borrow to fix a car, pay a medical bill, or pay the rent after loss of a job, it is extremely important to have access to credit on reasonable terms. Otherwise, there is a high risk of getting caught in the payday lender’s debt trap, making it truly difficult to pay off one’s loans and begin saving.

Unfortunately, forty million American households – 106 million individuals — lack access to mainstream credit and affordable small-dollar loans. Why? According to the Center for Financial Services Innovation, they “have little credit history, lack a credit score altogether, are unbanked or under-banked, or have impaired credit.” The current recession and credit tightening has exacerbated this situation, with the result that “millions of working Americans can no longer build a credit file or improve their scores, and are relegated to high-cost options for getting small loans.”