Increasing Access to Credit
The Important Role Banks Play in Strengthening Communities
Using credit is often negatively correlated with going into debt. However, when used correctly, credit can help individuals and entrepreneurs reach their goals and improve financial well-being. And when everyone has the opportunity to succeed, entire communities can prosper.
Access to Credit Creates Opportunity
For individuals, access to credit enables people to purchase a car, afford a college education, purchase a home, and even cover an unexpected expense, just to name a few. Without these opportunities it’s more difficult to commute to school or work, improve employment status, purchase a home and start building equity and, ultimately, generate wealth.
For entrepreneurs, access to credit helps business get started, grow, and thrive. Without access to credit, the dream of owning a business may never become a reality or expanding a booming business may not be possible. As a result, business owners are unable to generate profits, hire and pay their employees, create more jobs, or give back to their communities in the form of tax revenue and philanthropy.
Factors That Limit Access to Credit
There are many reasons why access to credit may be limited including a history of using credit poorly, i.e. a low credit score. However, many individuals are unable to establish a credit history to begin with due to language barriers, lack of knowledge or mistrust with the traditional banking industry, and simply a lack of bank presence in their community. These factors also contribute to the large unbanked and underbanked population in the US.
According to the Federal Reserve, 22 percent of the US population is either unbanked or underbanked. These individuals are more likely to be a racial or ethnic minority and have lower incomes. It’s not surprising that these groups are also more likely to be denied credit and use alternative and more expensive financial services such as money orders, check cashing services, pawn shop loans, auto title loans, payday loans, paycheck advances, or tax refund advances. Not only do these services cut in to their cashflow, they also create a vicious cycle of borrowing and repaying and at a higher price than traditional banking services.
For low-income entrepreneurs who have dreams of owning their own businesses, the scenario is similar. Many fail to meet the criteria to qualify for financing in the first place. Data shows that an unmet credit need among aspiring entrepreneurs in predominately underserved communities forces business owners to obtain more expensive loans that eat up their profits, creating the same vicious cycle.
Increasing Access to Credit Goes Beyond Traditional Banking Services
One way to increase access to credit is for banks to approve more loans. The issue is that banks are often unable to provide credit due to regulatory restrictions and/or risk concerns. However, they can and should play a role in increasing access to credit in other ways that are not directly tied to their business. Here are some examples of how banks can help increase access to credit for individuals and businesses:
- Awarding donations or grants to credit counseling programs
Many nonprofit organizations offer credit counseling services, which provide individuals with the direct assistance and personal coaching necessary to build or improve credit as well as saving, spending, and money management skills. Credit Advisors Foundation (CAF), in Omaha, Nebraska provides virtual, on-demand counseling and education for FNBO customers who may not qualify for a loan or other banking services. After the customer is referred to CAF by an FNBO banker, the organization helps consumers increase their credit scores so they can be approved for a traditional bank loan in the future. Since 2016, FNBO has supported Credit Advisors Foundation with more than $150,000 in grants which provided more than 2,600 individuals with credit counseling services.
- Making investments or loans to Community Development Financial Institutions
When access to a consumer loan such as a home loan or personal loan is not possible, nonprofit Community Development Financial Institutions (CDFI) help fill the gap and satisfy credit needs at lower income thresholds.
Omaha 100 offers affordable mortgage lending products to low- to moderate-income borrowers. With the support of FNBO and other community partners, their loan programs provide borrowers the opportunity to purchase new construction homes, renovated homes, and private homes in key areas that are being revitalized.
These loans offer reasonable terms that enable a family to repay the loan more easily. In addition to providing credit, these institutions often report to the credit bureaus. As a result, the use of these CDFIs can also help improve credit, moving the individual closer toward a banking relationship with a traditional financial institution. Since 2016, FNBO has invested more than $2 million with Omaha 100 which helped more than 275 families purchase a home.
CDFIs also help low-income entrepreneurs by providing loans to start up operations, purchase equipment, or manage inventory. The impact is not only realized by the business owner, but also by the community when jobs are created and income is generated. CDFIs like the Colorado Enterprise Fund (CEF), for example, provide business loans ranging from $1,000 to $500,000 to low-income entrepreneurs starting or operating a small business. Since 2016, FNBO has invested more than $3.5 million with CEF which helped them create or retain more than 7,600 jobs across Colorado.
- Providing Pro Bono Services
Due to their size and dependence on financial support, CDFIs and other nonprofit financial empowerment organizations would greatly benefit from the pro-bono support of local banks. Stepping up to service a loan portfolio or provide office space for a local credit counseling organization would go a long way in maintaining the stability and, ultimately, the impact of these necessary community partners.
At FNBO, our Pro Bono Volunteer Program matches employee skills with the needs of our community partners to create a skills-based volunteer opportunities. Employees with professional expertise in information technology, marketing, database management, and human resources, just to name a few, have help our community partners achieve their objectives more effectively and efficiently than they may have otherwise been able to.
- Recruiting Employees to Volunteer
Like donations, volunteers are necessary resources for nonprofit partners. Credit counseling organizations and CDFIs are unique in that they need volunteers with knowledge, skills, and abilities in personal and business finance. Bank employees are valuable assets when they serve on loan and credit committees or teach courses on various financial topics. Since 2016, FNBO employees have spent more than 156,000 hours volunteering in their communities, many of which were spent sharing the importance of building and maintaining credit as well as lessons on saving, budgeting, homeownership, and more.
FNBO is committed to giving every individual access to the tools, resources, and opportunities to reach their goals and improve their overall financial well-being. We also understand our role as a strong community bank places us in a unique position to positively impact our communities at every level. Whether it’s by providing financial advice and guidance, giving loans, investing in community partners, supporting our employees and locally-owned companies, or by taking measures to improve the environment, for 163 years we have remained steadfast in our focus and commitment to those who matter most – our customers, our communities, and our employees.
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