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Share of consumers who are credit invisible or unscored
Low-income workers across America have always faced obstacles in taking advantage of financial services that more affluent consumers take for granted, from checking and savings accounts to auto loans and credit cards.
But data released earlier this month show that a staggering 20 percent of Americans have nonexistent or thin credit reports and thus have trouble borrowing money.
A report by the Consumer Financial Protection Bureau (CFPB) said that some 45 million people lack a credit score with any of the major reporting agencies. Of those, some 26 million Americans are “credit invisible,” with no credit events on file, and an additional 19 million don’t have credit scores because of insufficient credit history. Individuals in these categories are disproportionately low-income, African-American and young.
For these millions of Americans, economic participation is more constrained than for the other 80 percent of the U.S. adult population.
“A limited credit history can create real barriers for consumers looking to access the credit that is often so essential to meaningful opportunity — to get an education, start a business or buy a house,” said CFPB Director Richard Cordray, of those excluded from the credit system. “Further, some of the most economically vulnerable consumers are more likely to be credit invisible.”
Young people and recent immigrants often haven’t had time to amass a solid financial record, and consumers who experienced bankruptcy are often forced to conduct only cash transactions. While one-third of consumers in low-income neighborhoods are credit invisible, the fraction drops to just 4 percent in high-income areas, according to numbers from the CFPB.
Living in one of Chicago’s poorest neighborhoods, De’Juan “DJ” Jackson has a low credit score and lacks a traditional bank account. Jackson, a 23-year-old father of two, sometimes cashes checks and pays bills at a currency exchange, which charges fees for both services. He said, “I understand that credit makes the world go round, but I just don’t think about it.”
He has student loans in default and outstanding college tuition bills and is able to conduct basic financial transactions with a Walgreen’s debit card. His old bank account was shuttered after overdraft problems. But he knows being in the red has a huge impact on him and his family, especially if debts take many years to clear. “I don’t want to start living my life at 40,” he said.
Sixty-eight million Americans cannot get access to reliable mainstream banking services and thus remain effectively outside the financial system, according to data released in October 2014 as part of the National Survey of Unbanked and Underbanked Households by the Federal Deposit Insurance Corp. (FDIC).
This figure includes 17 million people who are unbanked, meaning that they have no bank accounts, and 51 million who are considered underbanked, such that they rely on check cashers and pawnshops for their financial needs.
In the aftermath of the economic recession six years ago, the number of households in both categories increased considerably. Although the figures have since stabilized, half of African-American and Latinos households find themselves without significant access to financial services, as opposed to 1 in 5 white households. Americans under 35 are also disproportionately underserved.
Those who have never had an account cite a range of reasons for their financial status — not enough money, aversion to dealing with banks, high fees, ID problems and privacy concerns.
Low-wage workers pay more to cash their checks and use their money, often requiring payday loans and other potentially predatory services that create a cycle of poverty and keep people poor. Check-cashing fees can cost some low-wage consumers as much as 5 percent of every paycheck. For a $600 biweekly paycheck, that means a fee of $30. Purchasing a money order or paying bills can carry additional charges, meaning that families often waste money and time when they can’t use a conventional bank.
The revenue generated by such fees and interest amounted to more than $103 billion in 2013, boosting the profits of many corporations that work in the sector. Meanwhile, customers who complain about being badly treated or ripped off by institutions that cater to underserved populations say their plight gets little attention from the media or lawmakers.
Many people living on low wages are just a mistake or two away from serious problems when it comes to their ability to access the financial networks to which so many other Americans are accustomed.
“If you fail to pay back a cellphone bill or utility bill, these noncredit types of bills can get reported for nonpayment — not necessarily just student, auto or home loans,” said Joe Valenti, the director of consumer finance at the Center for American Progress. “If it goes into collection, missed payments would get reported as derogatory information into your credit file.”
“Also, if you had a bank account and had overdraft fees and the account was closed, that doesn’t affect your credit, but it goes into a checking account screening database,” he added, suggesting that negative banking history could hurt a person’s chances of opening other accounts.
With many bank branches leaving communities, some cities have been “launching Bank On programs to make sure low-cost and safe starter accounts are available,” Valenti said, in reference to government efforts to reduce barriers to banking. He cited the success of banking services that people can access using their mobile phones.
“Some people are choosing not to access traditional banking services,” said Jennifer Tescher, the president of the Center for Financial Services Innovation. “And we’re at a moment when prepaid debit cards can look like checking accounts. It’s worth considering whether the FDIC needs to update its definitions.”
“Access isn’t sufficient,” she said, adding that financial literacy in an increasingly complex environment isn’t a cure-all. “If you have an account, it’s what you do with it and more about just being financially healthy.”
“It’s easy for those of us who have a financial cushion to look at the choices that other people make and say, ‘That doesn’t make any sense. If they only knew better, they would do X and Y.’ Often the choices they have available are not good.”
Jackson hopes to learn new ways of coping with his financial problems and to lessen the cost of being poor. Recently he spoke with educational groups that encourage best practices for those who are underbanked. He is guardedly optimistic he can find a way out of his plight. “I don’t ask for pity on my situation,” he said. “I’m a father, and I take care of my kids, but people need assistance to thrive out here.”
“It’s a crazy economic world, and we just have to find a way to fit in it.”
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