Transcript CFPB FinEx Webinar: Tips to Help Your Clients Get Smart About Credit October 21, 2021 Presenters: Melinda Croes, Training Institute Manager, Credit Builders Alliance Facilitator: Heather Brown, Ed.D., CFPB Office of Consumer Education, FinEx Program Lead >>Ms. Melinda Croes: Hi, everyone. My name is Melinda Croes, and I am so glad to be here today for this presentation. Thank you so much to Heather and the CFPB for this invitation. Today I'll be talking to you about tips to help your clients get smart about credit. As we start out today, I'm going to go through a high-level overview of credit and credit building. Unfortunately, in the time that we have together, we don't have time to get into all of the nuances of credit, but hopefully, this can get you started and get you on the right track. Credit building can be defined as establishing and maintaining active paid on-time tradelines, which historically means either an installment loan like a student loan or a car loan or a mortgage or a revolving credit product like a credit card, and all of these have to be reported to at least one of the major credit bureaus in order to build credit. When we think about what makes an account an active account, that means an account that is paid on time and which payments are made regularly, and we suggest at least once in a 6-month period, but more is better. Having positive active tradelines on your credit report is the only way that someone with no or a thin credit history can establish or reestablish a credit score. In many cases, adding an active trade line is also an effective and faster first step in dealing only with debt for those with poor credit profiles who wish to boost their credit scores. While we all have a credit past, let's shift the focus on a behavior in the present to create opportunities for the future. There are several credit-building fundamentals which will help you build good credit. So, if you want to memorize anything from the presentation today, this is what I suggest to you put in the back or your mind and keep in your mind. So one is in order to see an increase in your credit score, you must have at least one credit product open and in use. This can be a credit card or a loan of any type, and that can include student loans as long as they're not in deferment or forbearance. The line of credit must be active, meaning that it is being used. This can be as simple as having a credit card with a reoccurring purchase on it, and that could be something like a streaming service account with a monthly charge that you pay off in full each month. It generally takes 3 to 6 months to establish a credit score if you're starting out without a score. It takes less time for one type of score, which is the vantage score, and it takes 3 months for the vantage score to be established and 6 months for a FICO score to be established. If you are starting out without a score, you will likely be scored in the mid six—after about 6 months. Note that using credit absolutely does not mean that you will go into debt or that you need to go into debt in order to have credit or a credit score. If you do not have a credit product that is open and actively being used, you simply cannot build credit. If you use a credit card, keep your credit card balances low. This is number two. You don't want to max out your card, meaning use the total amount of credit available to you. It's best to stay below 30 percent of the credit limit on each of your cards. So, for example, if you have a credit limit of $1,000 on a credit card, you would not want to spend over $300 on that card at any point. We want to keep those balances below that 30 percent mark, but keeping it even lower will be even better for your credit score. And then, third, we want to make sure that you pay your bill on time each month or at least within 30 days of the due date. This is really important is credit is not reported late if it's paid within 30 days of the due date. So we want to make sure that we're getting those paid on time to avoid any negative impact on our credit score. We may still be getting negative dings on our credit if—or I'm sorry. We may still be incurring late fees if we're paying late, but that doesn't actually hit the credit report unless it's 30 days or more past due. Let's turn now to two different categories of credit. We have installment and revolving. We'll start with those. We'll start with the installment credit such as auto loans and student loans. So installment credit is a loan that is dispersed as a lump sum and has fixed beginning and end dates. For example, you might buy a car that has a 60-month term, and it has a payment schedule that is determined at the time you take out the loan. For an installment loan to help you build credit, it must carry a balance, it must have a monthly payment, and it cannot be a closed account. While paying off debt is a good thing, once paid in full, a loan is no longer considered active and will not continue to build credit. Eventually, an established credit score will disappear if you have no other active accounts. Revolving credit such as a credit card is open-ended, and the monthly payment is based on the revolving amount. In other words, the borrower may charge different amounts each month, and then the amount that they owe is based on how much debt is outstanding. So, for example, if someone owes $1,000 on their credit card one month, their monthly payment is likely going to be around 3 percent of their balance. So, in this case, it would be $30. If the next month, they charged a little bit more and their balance is up to $1,500, their minimum payment would still be 3 percent of their balance, which would be $45. A key component of understanding credit is understanding account status. There are many different pieces of information that can appear on a consumer credit report, and account status is really a crucial component in understanding how different types of accounts can impact the credit score. So this chart we're going to walk through is going to show you how you can think about account status in four different categories. First up in the green, we have open accounts that have a positive payment status. So, for example, this can be a credit card that is open and being used on a regular basis or a car loan that you are making payments on, and this is really where credit building happens because these accounts are open. They're generating new activity each month, and they can really help to build your credit score. Next up in the orange, we have open credit accounts that may have some negative information. So, in this section, you might have a credit card that is currently 30 days past due. This negative activity will bring the credit score down. However, accounts in this category are still open to new activity, as theoretically, a consumer could resolve the delinquency and bring it back into that green positive status. Consumers can continue to use this account while they are in this derogatory status. So this is also where credit building can happen because we still have access to these accounts, and we can still use them to get back into that green good-standing category. Next up in red, we have accounts that are closed with a derogatory status, and this can be something like a charged off credit card. It could also be a collection account or a public record like bankruptcy. So these are derogatory accounts by definition. Consumers may still be paying off these debts, but they are closed to new activity. Therefore, they are no longer avenues for access to credit, and they can no longer be used for new purchases. Accounts in this category can only have a negative impact on the credit score because they are closed and you no longer have access to those lines of credit. So credit building really isn't a part of these categories in red, but we should certainly work to resolve any of these delinquencies. And then, finally, in quadrant four, the blue category, this reflects accounts that are closed to new activity, but they have been paid as agreed. So, for example, if you had an auto loan that had been paid in full and closed with no history of missed or late payments, this would belong in this category, and these accounts ultimately do have a positive impact on the credit score, but there's diminishing return as these accounts age, given that they are no longer open, but they do reflect positively on the credit report. Going back to the right side of this quadrant, this is where credit building happens. These accounts that are open, current, and have recent activity are considered active and, thus, have the most potential for positively impacting the credit score. Those accounts, again, that are in orange in the bottom right, those have the potential to become active, and they can help a consumer build credit if they are able to resume regular on-time payments on the account. The negative history and its impact on the credit score, that will diminish as time goes by. So, hopefully, this helps to clarify account status, as this is really important to understand when we're considering our credit-building strategies. Let's move now into credit products. So there are a lot of different credit products in the marketplace today that could help people build credit. These include the more traditional products like loans and credit cards that you'll find at a lot of local and national banks or online. They may also be offered by local nonprofit lenders like community development financial institutions, or CDFIs. So they may be available to you locally if you have those in your community. There are several different ways to build credit, including unsecured card, and this is what you think of when you think of a credit card. It does not require collateral or a down payment, and you can just use this up to the limit that you have available to you to pay for goods and services, and then you can repay it over time. The lender is, of course, going to charge interest on the amount owed unless you pay the balance in full at the end of each month or prior to the due date. Typically, these cards report to all three credit bureaus. With a secured credit card, this is very similar to an unsecured credit card, but you do have to put a deposit down on it. Usually, it's dollar for dollar, and that is kept in an account. And this serves as the security for the financial institutions. So, if you don't pay your bill, your deposit will be used to cover the debt. Typically, these secured cards are available to individuals who are not eligible for unsecured cards, maybe because they don't have an established credit history at this point. Maybe they're just starting out, or maybe their credit score is on the lower end of things. Typically, these secured cards do report to all three credit bureaus, and they're often really viewed as a starter credit building product. We have authorized user next, and an authorized user is a person who has permission to use and/or carry another person's credit card, but they are not legally responsible for paying the bill. Though the authorized user is not the primary cardholder, the account information will be reported on their credit report, that it will be reported as authorized user status, and becoming an authorized user can be a good way for someone who maybe is a young adult, even a teenager, to begin to establish a credit history or maybe someone who is a new American. There's a lot of people who could potentially benefit from authorized user status, but it's not a long-term credit building strategy. So we would want to encourage transitioning to another credit product after having established the credit score as an authorized user and hopefully built up some good habits there as well. Next step, we have personal loans, and a personal loan is an installment loan where money is borrowed from a financial institution that is typically paid back in installments, and we have student loans. Student loans do report to the credit bureaus, and they'll generate activity on the credit report. They'll also generate a credit score as long as they're not in deferment or forbearance. A credit builder loan might be less familiar to some folks, and this is an installment loan that is most commonly offered by credit unions and nonprofit financial institutions really for the sole purpose of helping people build credit. These are usually fairly small loans with 12- to 24-month terms. Instead of receiving money at the time the loan is made, borrower's loan funds are held in a savings account until the loan is repaid. Borrower's payments are reported to at least one credit bureau. So they may not be reported to all three of the credit bureaus, and those credit bureaus again are Equifax, Experian, and TransUnion. Another credit-building product that you may not be familiar with or may be less familiar with is a social loan or a lending circle, and these have various names depending on culture and language background. But they might be referred to "susu" or "tandas" in some cultures, and basically, this is when people pool their savings. So it's a group of people who's all pooling their savings on a regular basis with each member taking a turn to receive the pooled savings, and these types of loans really are pretty common in a lot of different cultural backgrounds. But they can be linked to credit building if the loans report to at least one credit bureau, and Mission Asset Fund is the organization that's probably the biggest organization out there that's doing these social loans. Then we have rent reporting for credit building, and rent reporting is a growing field. And it's the regular monthly reporting of tenant rent payments to at least one of the major consumer credit bureaus for inclusion on consumer credit reports, and these are factored into some credit scoring models. So, as we think about all these different products and we think about this need to build active credit, it can get a little bit overwhelming. So we want to think through which credit-building products are right for me and right for me right now, because that may change over time as we continue in our credit-building journey. And the answer to that is really going to vary based on where we are starting from and what our current financial situation is. There is not really a one-size-fits-all approach, which can sometimes be a little bit confusing for folks. So we're going to approach this by looking at a few different categories of scored and unscored consumers. So first up, we have credit invisible, and this is someone who has no credit report and no credit score due to a lack of credit history. Then we're going to move to unscored, and this is someone who doesn't have a credit score due to a limited credit history, but they could have a credit report. Then we have someone who's thin file, and this is someone who has limited credit history. It may be scored or unscored, and this is usually somebody who has like three or fewer trade lines on their credit report. So they just haven't used a lot of credit. And then someone who is thick file is someone who has a really robust credit history, including multiple active accounts and f account types on their credit profile. So we're going to go through examples of these different credit profiles starting with the credit invisible. So, if we're working with participants that can make payments on time, we really want to think this through. We don't want someone to take on a new credit-building product whose budget really can't afford it. So we have to think through, does this person have enough money to pay a credit-building product and pay a credit-building product even when maybe their income is a little bit diminished? Lots of folks work seasonable jobs or have fluctuations in income. So we really want this conversation to go hand-in-hand with those budgeting and cashflow conversations. So someone who is starting out with the credit invisible profile, again, this is someone who doesn't have a report and they don't have a credit score. So they don't have any positive or negative information on their credit report. Our first example of someone who is credit invisible is Trevor. So he's 17 years old, and he's still in high school. Upon graduation from high school, he wants to move into his own apartment. He wants to attend college, and he wants to get a good job. He knows that credit is going to be important to accomplish these goals. He is really an excellent candidate for credit building because, again, he's starting with a clean slate. He doesn't have any credit. So, if you're under age 18, you don't have very many options because you do not have the ability to answer into a contract yet until you're age 18. So this makes most credit-building options unavailable to young adults who are under age 18. He could, however, become an authorized user on the account of a parent or trusted guardian, and he could use that to start establishing credit in his name. And then once he turns 18, he could potentially transition to a secured credit card and unsecured credit card or really any of the other products that we talked about, and even though he's under age 18, there's nothing that says that he can't be learning about the credit-building options that are available to him and putting into practice some good money management and budgeting habits, even at his young age. Next, we have another example of a couple, and here we have Abner and Lydia. They are also credit invisible. So Abner and Lydia are immigrants, and they've been in the United States for just a few years. They have income that's sufficient to cover their basic needs, and this income allows them to save towards their goal of renting another apartment and purchasing a car. However, when they recently went to apply for an auto loan, they were offered a really, really high interest rate because they don't have a credit score. So now they are coming to you because they're interested in building their credit. So, again, Abner and Lydia are kind of in the same situation as Traver, though they're a bit older, and they are really excellent candidates for credit building because they don't have any negative information, any debt or anything like that to resolve, and they could definitely establish a credit score, a FICO score in 6 months and then continue to use that with at least one trade line reporting. But one of the things that we want to check in with our participants is what credit-building products align with their values and goals. In the case of Abner and Lydia, they follow Sharia law, which means they do not believe in earning or paying interest, and this is going to impact the credit-building products that are available to them. So we always want to encourage this discussion with participants around how they have used credit in the past or why they have not used credit in the past, and we don't want to make assumptions. But we do want to be able to support them in finding an approach that works best for them based on their values, how that—and situation, and budget. So, within the coaching process, we talked through their values and their goals, and we do, indeed, want to find a product that doesn't have high interest—or actually any interest at all or compounding charges so that we are aligning with their beliefs. So, for them, joining a lending circle or a rent recording could help them to establish their goal of establishing their credit score. Additionally, after they have established a credit score, they may be eligible for an unsecured credit card with a zero dollar annual fee, and if they always pay on time, then they would never pay interest charges. So, depending on their interpretation of their beliefs, this could potentially be an option for them, but it would just really depend on what their comfort level is with that. One of the additional considerations for Abner and Lydia as well as many other immigrants, refugees and asylum seekers, is that they may or may not have a Social Security number, and it is possible to apply for credit using an ITIN number, or an individual taxpayer identification number. So you can certainly be establishing credit as an immigrant or likewise, but the policies for doing so may vary across lenders. So that would be something to research in your communities as well. Next step, we're going to move to consumers with a thin file. So, again, this is someone who has limited trade lines in their credit report. So they may or may not have a credit score. This is generally defined as having three or fewer open and active trade lines, or this could even be someone who has just an account in collections, where they might have a report, but they might not have a score. So, again, assuming that the participant has the cashflow needed to make timely payments, they are also likely really good candidates for credit building. If they have accounts in collections, it's important to understand how old these collection accounts are, what type of collection accounts they are, as we would approach this differently depending on if it's a medical, student loans, credit cards, et cetera, and make a plan for dealing with them. And here we have Raven. So Raven recently moved to be closer to her family. She works as an adjunct professor, and she tutors. And her income is somewhat inconsistent and somewhat seasonal based on this. She discovered recently that she could buy a house for less than she's paying in rent, and she could potentially access funds for a down payment through a local homeownership program. On her credit report, she only has student loans, which she is currently making payments on. So that is considered an active account. She has a 645 credit score, and she really hasn't used any other credit outside of the student loan, as she is worried about credit card debt, but at the same time, she does borrow from family and friends, and she does sometimes use payday loans when her income isn't quite enough to meet her expenses. But her repayment on those payday loans is not something that is reported to the credit bureau. So it is not helping to build her credit score. So, in our conversation with Raven, we want to explore any concerns that she has about credit use and debt and take that into consideration as we consider which products she might use. Is she a good candidate for credit building? Yeah, she definitely is, as she has a lot of potential to build her credit in a few different ways that aligns with her values and goals. So she could do a few things strategically. She could open an installment account, like a personal loan or a credit builder loan, and she does already have that student loan that's an installment account as well. For the revolving account, she could potentially upon up a secured credit card. That does require a deposit. So she would need to have the cash on hand available to put that down for the deposit there. Because she is in that midrange of credit scores, she may be able to access an unsecured credit card, but it may have a high interest, given that her credit score is 645. Having these revolving accounts that she uses at least once a month and pays in full each month by the due date, that could help her expand her credit profile and increase her credit score really without getting into debt, which is a concern that she has and a value that she has expressed. So we just, again, want to pair our credit conversations with those good budgeting conversations as well to make sure that she is able to keep up with any payments that she has in order to really build her credit score. And then next up, we have thick file participants, and this is the final credit profile that we'll cover today. A thicker file is characterized as someone who has a pretty robust credit history, including multiple active accounts and different account types. So they're having at least three to five active trade lines, and they probably have more than that. And this is someone who does have an established credit score. We'll use Martin and Juanita as an example in this story. So they are in their early sixties. They are homeowners in a rural community. Martin works full-time as a truck driver, and he makes just under $3,000 a month. And Juanita is not working due to medical issues. Because of Juanita's medical issues, their medical debt is high, and their credit card usage increased as well in order to meet their basic needs. They have really used credit consistently for many years, and they both have, like, really good scores. Martin is at 740, and Juanita is at 755. They always make at least the minimum payment, but they really are drowning in debt, and they sometimes see their balances go up rather than down because of the interest that is accruing each month. They're really, really stressed about their debt, and they just feel like they can't get out from under it, and they can't get ahead. So for those with thicker credit files, one of the questions to explore is whether they need credit building—again, that's like adding new accounts—or do they need to really look at their existing credit profile, look at their budget, look at their benefits, and think through how to maximize their credit score. So for them, credit building in terms of like adding new accounts and such may not be the approach that they wanted to take, but instead they want to look at what they can do with their existing credit profile. So they could go ahead, do an inventory of their debt. I know that sounds easier said than done, but the CFPB has some great resources on how to do that and how to do that effectively with your clients. And they can develop a plan for repayment, and again, like looking through their budget, looking to see if there's any benefits that they may be able to access as well. They also may want to go ahead and create a debt payoff strategy, pay down that existing debt—again, you want to reduce that utilization—discontinue or reduce the use of credit cards to the extent possible, debt consolidation or debt management plans may be something they want to consider as well, and seeking out assistance with the medical debt. So, overall, credit building can be a really, really powerful strategy but certainly not a one-size-fits-all strategy. It's essential to evaluate how your participant starting credit profile will impact their ability to achieve success in credit building and then continue to reevaluate and create a plan for graduation to other products over time. So we would just encourage you to think through the participants you are working with or your own personal situation and identify where you are in terms of your credit profile and how some of these credit-building products could support you as you seek to build your score. When we think about credit building too, we want to consider the red flags. So encouraging someone into credit building prior to being stabilized or addressing some significant debt issues, that could certainly backfire, and we want to avoid that. So some red flags that we think are important to pay attention to are if someone is in crisis mode, which is strong and regular tendency to miss payments, if they're struggling with paying basic bills, if they already have a really high utilization rate, if they have large accounts in collections, if they're at risk of garnishment, or if they're contemplating foreclosure or bankruptcy. This would not be the time to venture into the credit-building side of things instead to address some of these immediate crises. The following questions can be useful in assessing readiness as well. You want to think through the purpose. Why do we need credit? Do we understand the terms and conditions of the credit products that we're signing up for? Affordability. Again, what can we afford? How will this impact our financial stability? Are we prepared to be successful? Are we on top of those bill payments and keeping up with those to make sure that we won't miss any payments, we won't be late? And then we also just want to think through how a new loan would impact your credit profile. Now that we've reviewed all this, let's go ahead and wrap up this session with a review. Again, we want to review our credit reports, check accuracy, know our score and score category and risk factors, and what products we are eligible for before applying for any new credit products. There's so much more that we could say about credit, but these really are the key points. Building credit happens with on-time payments, are reported to the credit bureaus each month, and we'd invite you to continue to learn more at creditbuildersalliance.org. And, with that, again, our thanks to the CFPB for including us in this presentation, and I'm going to go ahead and turn it back over to them for more great information about all things credit and resources that the CFPB has on hand. Thank you again.