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About 45 million people living in the United States are unable to qualify for credit from traditional lending sources. This is especially problematic for America’s black and Latino population, according to the most recent government statistics.
Having no credit history makes it nearly impossible for them to secure a mortgage, finance a car, own a credit card, or refinance student loans.
Many people in these communities, lacking credit and borrowing alternatives, have been drawn to payday loans—small-dollar loans that can carry average annual percentage rates of 391 percent, according to the Center for Responsible Lending, an advocate for tighter payday lending regulation.
Consumers Union, the advocacy and mobilization division of Consumer Reports, recommends using a fiduciary financial planner to understand your options, but be aware that they can be pricey.
Another alternative may be a nonprofit, community-based credit counselor such as UnidosUS, an advocacy group. Through its affiliates, UnidosUS has developed programs that combine financial education, coaching, and access to safe financial products to help Latino families to make informed economic decisions.
Note that some credit counselors may charge fees for their services, which would be added to the payments you make to them.
Another option: Turn to The Volunteer Income Tax Assistance program set up by the IRS. VITA mainly offers free tax help but it may also be able to assist you to better understand your finances, says Mike Calhoun, president of the Center for Responsible lending.
If you decide that getting a loan is your best option, here are some nontraditional places to look.
Join a lending circle. Mission Asset Funds, a San Francisco-based nonprofit with 52 affiliates in cities across the U.S. helps individuals understand their financial options, obtain credit, and begin building their credit history.
It does this by using “tandas” or lending circles. Those who join agree to pay a certain amount of money each month—say $50 or $100—and that money will then be used to provide interest-free loans of up to $2,500 to those in the circle. The loans are guaranteed by MAF through charitable contributions and foundation support.
In order to participate, you need to agree to take a financial planning course and sign a promissory note. That way, your payments will be reported to the credit bureaus, helping those in the circle to establish credit.
"We don’t necessarily want to become the lender of choice,” says Jose Quiñonez, founder and CEO of Mission Asset Fund. "We’re trying to help low-income people, immigrants, people in the financial shadows, people with bad credit or no credit so they can access credit."
Take out an installment loan. Oportun is a lender that markets installment loans for people with thin credit files. While the interest rates on its loans are high—from 30 percent to 50 percent—they may be a better alternative than a payday loan, says Calhoun.
Apply for a secured credit card. Calhoun also recommends getting a secured credit card, in which a line of credit is secured with money deposited into an account. You’ll still have to make monthly payments, but the money in your account will be your credit limit, he says. Payments are reported to the credit bureaus.
Open an account with a credit union or community bank. Both of these types of consumer lenders are exempt from the CFPB rule. They tend to be small depository institutions and act like traditional banks, making loans and providing a wide array of other financial services.
Even if you have no credit history, these banks will consider other factors than your FICO score including the relationship you have with the bank, which could help you to be approved for a loan.
"Establishing an account in a depository institution is often the best first step for establishing the credit needed in case of an emergency," says Calhoun.
Be wary of online lenders. Online companies such as San Francisco-based Upstart and LendUp offer loans but this is one area where consumers should tread with caution.
Many, especially those with thin credit histories and low FICO scores, find such companies appealing because they rely on alternative data and artificial intelligence—rather than just a FICO score—to measure creditworthiness.
But regulators have been concerned that in some cases the data and algorithms being used to predict creditworthiness may be unwittingly discriminatory.
The Consumer Financial Protection Bureau, for instance, fined LendUp nearly $4 million last year, claiming that it misled consumers by not helping them to access cheaper loans, as it claimed to do. The CFPB said it also failed to report credit information to the credit bureaus.
In a statement at the time, LendUp said that the regulatory actions addressed legacy issues that mostly dated back to its early days as a company, when it still had limited resources.
"Today it is extremely hard for consumers to know who are reliable lenders in the fintech world," says Calhoun. "Some are as bad or worse than payday lenders," he said.
The CFPB did give the green light for Upstart to continue lending. The company's CEO, David Girard, says Upstart has a thriving business and has originated about 100,000 individual loans since 2014, totaling about $1 billion. The majority of borrowers use the loans to pay off high-interest credit card debt, he says. According to Girard, the interest rate Upstart charges average about 13 to 14 percent—lower than many credit card rates.
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