You've probably heard about the importance of a good credit score -- it opens access to affordable mortgages, auto loans and reasonably priced credit, but it could also help to secure a job, buy a cell phone or establish utilities without paying a hefty deposit. And a low credit score will cost you. People with a weak credit rating will pay approximately $250,000 more in interest throughout their working lives than those with stronger scores. For entrepreneurs, that quarter of a million dollars could go a long way towards building assets, starting or growing a company, and creating jobs. Going from a weak to a good score can be one of the biggest hurdles that entrepreneurs are facing in today's economy.
The goal of microlenders has always been to work with disadvantaged entrepreneurs. But that group has grown in the wake of the financial crisis, making the work of these nonprofit organizations even harder. Clients who had promising businesses and decent credit scores in the past have now been walking in the door with credit blemishes or more complicated financial pictures -- and those are the clients who at least have some credit history to draw upon. The pool of clients who don't have any credit profile has also expanded. These complicated situations have made it ever more difficult for organizations to service these customers with their own typical loan products (or refer them to partners).
In reaction to this trend, FIELD at the Aspen Institute teamed up with Citi Foundation to launch a pilot targeting these customers in its Asset Building through Credit pilot program. The national program is working with five microenterprise organizations to provide financial education and credit coaching in combination with a secured credit card to boost the scores of entrepreneurs and get them on track to growing their business. The program has its roots in research that indicates that pairing financial education with the responsible use of a credit product more often results in longer lasting behavior change and financial capability.
Here's a typical scenario in the Asset Building through Credit program: a barber shop owner from East St. Louis had a credit score that was too low to qualify for a typical microloan from nonprofit provider justine PETERSEN. The organization guided him to its credit coaching program, and provided him an action plan to boost his score, while also giving him a secured credit card. Over the course of 16 months and the completion of this action plan, the business owner not only qualified for a microloan to invest in his small business but also raised his score by 82 points.
That's just one example, and we're hopeful that this pilot program can affect many more. Given the uncertain economic outlook and the continued decline of once dependable assets like a home, a good credit score might just be the most important asset to acquire and protect.