Credit Building and Policy Change Lifting Consumers from the Predatory Grip

 

Guest blog written by: Justin Barker, HomeOwnership Center Coordinator, Pathfinder Services, Inc.               

While some may be beginning to celebrate in the continued rise of our economy, far too many Indiana residents still suffer from financial instability due in large part to subprime credit. A new report from the Corporation for Enterprise Development (CFED) reveals that 51 percent of Hoosiers have a EquiFax Risk score below 720. Our state ranks 46th in the nation for rate of bankrupt consumers.

Many of these families are not poor in the traditional sense. With the average annual pay for an Indiana worker hanging around $45,730, households that may have a decent income still fall further behind because of battered credit or lack of credit. These situations result in consumers having to engage with predatory lending practitioners. Pay day loans with an APR cap of 391% wreak havoc on Hoosier families. With this being the only credit options available to such a large percentage of Indiana consumers, our state will continue to suffer.

Our current state’s policies are not doing enough to help the situation. CFED’s 2016 Assets & Opportunity Scorecard found that Indiana ranked 20th in policy rankings revolving around financial assets. Only 19 out of 67 policies, that could give struggling Hoosiers a footing financially, have been adopted; and only 1 of those 9 policies dealt with predatory lending protections.

Thankfully there are some in our state battling these issues. Non-profit organizations and networks are working tirelessly to help consumers improve their financial situation. The Indiana Assets & Opportunity Network is a statewide coalition working to increase asset acquisition for low-wealth Hoosiers and to strengthen local economies through policy advocacy and capacity building. Pathfinder Services, Inc. is one such partner. Pathfinder Services has created opportunities for families to grow in their financial knowledge and capacity as consumers. Participants of Pathfinder’s programming receive sound credit building education and counseling from nationally certified professionals in the field. We’ve also formed partnerships with local banks to offer innovative credit building opportunities for participants with little to no risk for all parties involved. We have seen hundreds of cases where program participants have raised credit scores from the mid-low 500’s to a median score of over 700. When crisis hits, that difference in credit score could make or break a family financially for years to come. The low fee, low interest credit options available to a consumer with a 725 credit rating can be exactly what a family needs to allow them to adequately handle medical bills flooding in from an unexpected illness. A good credit rating can enable a family to buy a home at a lower monthly cost than renting; saving them money while also building a big asset. The benefits of strong credit ratings are endless.

However, currently these options are simply not a reality for a large percentage of Hoosiers.

There is much more that we can provide to all Indiana residents, giving them an opportunity to take charge of their financial lives and plan for a more prosperous future. The policies adopted by our state will help Indiana’s families pull themselves out of the downward spiral of predatory debt – and provide a foundation for our state’s long-term economic health. For example, policymakers should:

Significantly lower the APR cap on pay day loans. Many states have already lowered their cap to the 30%-40% range. Arkansas has even lowered its payday loan APR cap down to 17%.

The same policy alteration should apply to short-term installment loans. 16 states have placed an APR cap on short-term installment loans between 30%-40%. These decreases in APR could help consumers who have been trapped in hopeless debt situations. 

If policymakers choose not to act, thousands of Indiana residents will have little hope of moving up the economic ladder and contributing to the state’s long-term growth. That would be the wrong choice for families and the wrong choice for our state.