What does your credit box look like?

Credit is a subject that credit unions find incredibly familiar. It is the driver of everything we do, from our profit to our promotions to our processes. We understand what type of credit risk we want to take in our loan portfolio, we think about how we want to attract those borrowers that fit our preferred profile, and we chase credit recovery through collections efforts when our borrowers fail to repay. We know exactly what the extension of credit means for our institution. In a financial institution, a credit score is simply more numbers that are part of a larger calculation.

However, I wonder how often we think about what credit means for the average, every day people we serve. Most of our members are not as familiar with credit scoring models as we are, and many do not watch their credit closely as a measure of their financial health. Credit may be the component of the 5 ‘C’s’ of credit that we may potentially take too seriously. We need to be willing to have a fuller understanding of what makes up an individual applicant’s credit score, and not just because we want higher loan yield or need to grow our portfolio.  It is often easy to make a moral judgment about an individual based on their credit score. Credit scores tell stories. Good credit scores are stories of responsibility, of opportunity, and in some cases, of privilege. Some members are fortunate to have good credit because they have strong social ties willing to lend a hand in time of need, allowing them to keep their credit score pristine in times of challenge. Other credit scores tell stories of divorce, of disappointment, and of heartache. These stories are stories of an abrupt layoff, of an unexpected cancer diagnosis or car accident, or other unanticipated tragedy. Still others tell stories of lack of access – of neighborhoods populated with subprime lenders at ‘buy-here-pay-here’ car lots, check cashers and payday lenders. These credit scores may tell stories with deep histories. The numbers on paper cannot reflect the distrust in financial institutions behind the scores. An absent credit score may not fully tell the story of the member whose parent was redlined by a local bank, or how a family lost everything as a neighborhood declined around their property.  The number on paper doesn’t reflect the challenges to access faced by that family, leading them to be un-banked or underbanked a generation or two later.

A lack of credit score can reflect a history in a country with an unstable financial system. A lack of credit score can reflect a language barrier or unfamiliarity with the United States financial system. This lack of score can lead to lost housing opportunity, further perpetuating the cycle of spotty borrowing.  Character is important. As a safe and sound institution, we want borrowers who will repay.  This is not an article about lending to underserved communities, risk management or credit policies. Your own balance sheet and strategic plan will determine what that means for your institution. Still, credit has implications and has a legacy. In the United States, it has been used to create opportunity for some and has been a barrier to access for others. My institution, North Side Community Federal Credit Union, is one of a very small handful of credit unions in the country that operates a housing counseling agency. As part of our services, some of our staff meets with individuals for a lengthy two-hour credit counseling session. We see a wide range of stories. Yes, some have destroyed their credit with irresponsible financial management. Those stories come from all walks of life. Many more have never learned about credit or had an event beyond their control that rendered them unable to responsibly repay their debt. The one thing they all have in common is a desire to improve their credit, understanding it will improve their financial situation.

As cooperatives, we have a unique opportunity to look beyond just the scores we see on paper. We have an opportunity to use credit to help people improve their lives and provide access to greater opportunity. This will look different based on each individual field of membership, but the balance sheets are not our primary mission. The balance sheet is simply the method by which we accomplish our mission.  Recently, the CEO of a CDFI credit union shared how excited she was to offer an ITIN product. An outside observer commented to her that what her credit union was truly doing was offering hope to people. Hope is a rare commodity.  If credit unions can offer that to people through the way we transact we can offer a unique value proposition that will be difficult for any other financial services provider to compete on.