Newspaper article International New York Times

For the Poor, Debt Can Be a Good Thing

Newspaper article International New York Times

For the Poor, Debt Can Be a Good Thing

Article excerpt

An American program that helps the poor build their credit scores by loaning them money shows how integral borrowing has become to modern living.

Last October, Jeffrey Shavers, a hotel maintenance worker in Chicago, took out an extremely unusual $300 loan. Mr. Shavers might have liked to use the money to visit his daughter, a college student in New Orleans, or to buy his 10-year-old son a new bike. But he couldn't, because Mr. Shavers never actually saw the money. The cash went into a locked savings account that he couldn't gain access to. "It's like an abstract $300," he explained.

But the money wasn't just sitting there. It was helping him build credit. Mr. Shavers began paying back the loan, which was orchestrated by the Local Initiatives Support Corporation, a community-development organization, in $25 monthly installments. And for each $25 that he paid on time, another $25, funded by a federal grant, entered the locked savings account. By the end of a year, the original $300 will be coupled with those payments for about $600 in cash. More important than the money itself, however, is the credit score he will have earned if he pays on time: something close to 689, the United States average. With a good payment record, he might be able to get something much more concrete: a Visa card.

Encouraging low-income people to borrow money and then to get a credit card enabling them to borrow more may seem counterintuitive or even a little risky. For generations, it has been said that hard work and thrift are all Americans need to get ahead. The financial crisis also showed that unscrupulous lenders stand ready to prey on poor people eager to take the ready cash.

But this dichotomy -- debt: bad, savings: good -- is out of touch with the way Americans live now. More than 70 percent of Americans have a credit card, and very few of them buy a house or a car without borrowing some money. Credit is so central to our lives that job applicants can expect to have theirs checked as a proxy for responsibility and trustworthiness.

Life without credit is not only expensive; it's also potentially ruinous. The most desirable apartments are off limits, because their landlords run credit checks. Without credit, Americans have to make large deposits to turn on their electricity or gas or to put their phone bills in someone else's name. If you want to buy a car, and you have good credit, a $10,000 loan might cost you $1,300 in interest. With bad credit, you'll pay $7,600. If that car breaks down, a $500 expense might mean a crushing payday loan, or even a lost job. Mr. Shavers, who currently makes $16.50 an hour, would like to own a home one day. He knows that he will never be able to do it unless he builds his credit first.

It's time that Americans learn how to save. Last year, they saved an average of 4.5 percent of household income -- about half the historic rate -- and most of that was concentrated among wealthier households. So it's understandable that a number of groups are fixated on teaching the poor to save money. But a growing number of them are recognizing that to enter the economic mainstream, people also need good credit. (Even the post office has explored the possibility of modest banking and loan services for customers.) This can be a hard sell. "We're fighting against the sentiment that you should cut up all your credit cards," says Ricki Granetz Lowitz, a director at the Local Initiatives Support Corporation's Chicago office.

Yet saving and responsible borrowing, Ms. Lowitz realized, amount to the same thing: putting aside small sums to reach a goal. So she took the type of matched savings account that is used to encourage low-income people to save and tweaked it into something called Twin Accounts -- the sort of loan that Mr. …

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