TOPICS > Economy

For Those With Low Incomes, Help Creating a Credit History

May 1, 2009 at 6:30 PM EST
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Spencer Michels reports on a program that helps low-income people with no credit gain access to loans and financial counseling.
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JUDY WOODRUFF: Next, getting credit when credit is tight. NewsHour correspondent Spencer Michels has our story.

SPENCER MICHELS, NewsHour Correspondent: In poor and minority neighborhoods, like New York’s Washington Heights, in the shadow of the George Washington Bridge, getting a loan or establishing credit is a real problem, especially in perilous economic times.

Banks dot the area, but few are willing to cater to the mostly Dominican residents who live here. They are part of the roughly 28 million Americans who have no checking or savings account.

But you can’t buy a business like the New Look Hair Salon without savings or credit. Hairdresser Francia Santiago, who came from the Dominican Republic 18 years ago, knew that firsthand.

FRANCIA SANTIAGO (through translator): I used to always be denied when I applied for credit, and I didn’t know why, because I thought I was fine.

SPENCER MICHELS: Santiago wanted to own the shop she was working in. And in 1998, she found a neighborhood credit union that showed her the way.

FRANCIA SANTIAGO (through translator): They helped me plan my budget and taught me how to avoid bouncing checks and how to pay my bills on time.

Financial counseling at core

SPENCER MICHELS: The Neighborhood Trust Federal Credit Union, located in a bus terminal next to the bridge, has been serving as a bank for low-income people since it opened in 1994.

It is operated by a non-profit called Credit Where Credit is Due, both organizations designed to help Latino immigrants and others establish credit and avoid predatory lending.

So you lived in this neighborhood...

They were the brainchild of Mark Levine, a schoolteacher living in Washington Heights who got to know the families of his students.

MARK LEVINE, Founder, Credit Where Credit is Due: And I was just struck by how few had bank accounts and how many used check-cashing stores in lieu of banks, how many, when they needed credit, went to pawnshops and loan sharks.

SPENCER MICHELS: Now, you say there are loan sharks. What is that about?

MARK LEVINE: Prestamista is Spanish for "loan shark." And unfortunately, it's an industry which is alive and well here in Washington Heights. The interest rates are astronomical, as high as 5 percent to 10 percent a week. There is a threat of violence if you don't repay.

SPENCER MICHELS: He said he understood why commercial banks didn't lend.

MARK LEVINE: Frankly, for them to make a $500 loan, it's as much work as making a $50,000 loan. It's not profitable for them, and they're generally not interested.

SPENCER MICHELS: But he was convinced there had to be a solution. So Levine became a social entrepreneur, raising grant money to open a credit union that had a bilingual staff, offering small loans to people with no credit, and giving free financial counseling.

The program has been so successful, it is now mostly self-funded from its 4,000 members' deposits. It has expanded to other parts of the city, partnering with nonprofit groups, to provide financial education classes.

Credit Where Credit is Due gives the instruction free of charge. The other organizations provide the venue and the students.

This recent class took place in the Bedford-Stuyvesant section of Brooklyn and focused on trying to wean people from overusing expensive credit cards.

INSTRUCTOR: When you're paying $100 a month, you're paying $1,193.45 in interest alone. So if that doesn't motivate you to pay as much as you can towards your credit cards to get rid of them, then I really don't know what will.

Learning how to use credit cards

SPENCER MICHELS: With the downturn in the economy, classes have been even more in demand.

MARILYN SWEENEY: I learned that, number one, I'm not the only one that's at this age and stage in my life and don't have any sense about how to manage their money.

SPENCER MICHELS: One of the groups it works with regularly is the Doe Fund, a large New York nonprofit that trains, counsels and employs homeless men and women.

Among current participants are 22-year-old Mark Banks, who spent two years in prison for robbery, and 28-year-old Odelio Cepeda, who dropped out of high school after ninth grade, lost a job, and became homeless. Both had longstanding problems handling money.

MARK BANKS: Like, if you give me any amount of money, I will find a way to spend that amount of money in minutes. But you can't live your life like that. You know, if you keep spending like that, you'll never have anything and you'll just be financially unstable.

ODELIO CEPEDA: I never saved money for rainy days. I had a lot of expenses, like coffee. I have a big coffee problem. I love to drink like 8, 10 cups a day, and that's where all my money was going.

SPENCER MICHELS: At the Doe Fund, Banks and Cepeda took classes from Cruz Rodriguez, a counselor from Credit Where Credit is Due.

CRUZ RODRIGUEZ, Counselor, Credit Where Credit is Due: We go through every spending that the person does, and we even mention like lottery tickets or snacks. And by doing that exercise, the person visually sees what they're doing, and they kind of become aware of how they're overspending.

SPENCER MICHELS: Rodriguez encourages his students to get a credit card to establish a credit history, but then pay off the balance every month.

ODELIO CEPEDA: I want to establish my credit, because, like, to get an apartment, you need credit for an apartment. You need credit for everything nowadays.

SPENCER MICHELS: Aren't you concerned, if you have a credit card, you're going to spend too much?

ODELIO CEPEDA: No, I'm not worried, because Cruz taught me how to spend my money. And if I have any problems, I'll just call Cruz.

CRUZ RODRIGUEZ: One of the things is that Credit Where Credit is Due is that we offer them counseling for life. So...

SPENCER MICHELS: For life?

CRUZ RODRIGUEZ: I mean, whenever they're in -- they're experiencing some financial problems, they could always call me or e-mail me or go to the credit union and ask for counseling.

Emphasizing savings

SPENCER MICHELS: Credit Where Credit is Due claims great success with its clients, whose average income is around $15,000 a year. Most of them start out in serious debt, according to executive director Justine Zinkin.

JUSTINE ZINKIN, Director, Credit Where Credit is Due: Within two years of being in our program, people reduce their debt by $8,000. They have saved on average $800. Their credit scores on average have gone up 200 points.

And you put that package together, and what it represents is on average over two years about $2,500 in savings, but more importantly, as you think about this money then being invested and saved over the long term, it becomes an opportunity for sending a child to college, an opportunity for retirement, home ownership.

SPENCER MICHELS: Zinkin says the credit union stays viable partly because some community-minded customers are not poor and the income from their larger accounts helps to offset the high costs of working with the un-banked population.

She says the concept of community-based credit unions is spreading. There are 200 across the country.

JUSTINE ZINKIN: Here in New York City, there are about 30 different community development credit unions that represent about $70 million in assets. That's 40,000 members. The typical credit union like ourselves is relatively small, but together we have a significant impact.

Starting a business

SPENCER MICHELS: Taide Jimenez, a native of Mexico, endorses that. A restaurant worker, she worked with the credit union to fund her own business.

TAIDE JIMENEZ (through translator): I came to this credit union looking for support, support with my business plans, how to start up the business. When I came, I didn't have any credit, and I didn't have any information about how to start a business.

SPENCER MICHELS: Now she is about to open a Mexican Caribbean restaurant in the heart of Harlem, an enterprise that is costing her $35,000, part loans, part savings. It never would have happened, she says, without the credit union.

TAIDE JIMENEZ (through translator): I feel happy, because I'll be able to help my family financially so they won't need anything. And I'll have a stable job for myself.

SPENCER MICHELS: Jimenez's experience soon may be even more common. Credit Where Credit is Due is planning to expand further throughout the city in the coming months.