By Doug Matus
Access to credit is a practical necessity in today’s economy. Much more than a means to make purchases, credit enables individuals and businesses to meet everyday needs. It’s a sad reality that many people do not realize the importance of credit until their access becomes limited.
People without credit access have fewer choices of housing and employment, and often turn to predatory lenders to pay for emergencies. In order to understand what access to credit means, consider the practical applications of credit, along with what happens when you have no credit. Lastly, a look at initiatives to widen credit access will reveal the true importance of this valuable resource.
Credit comes with both positive and negative associations, most of them tied to its use with consumer goods. Used responsibly, credit allows for people to acquire things normally outside the scope of their disposable income. Used irresponsibly, it can enable impulse buys and a rapid accumulation of interest that make it nearly impossible to get out of debt.
Credit also lets consumers qualify for car loans and home mortgages, and can impact insurance, a housing rental, and even employment. Businesses rely on credit just as extensively as consumers. In fact, access to credit is so important for the survival of businesses that the U.S. Small Business Association offers loans especially for businesses.
“Credit is key for a healthy and sustainable business,” says Rob Wilson, CEO of C7a, an SBA 7(a) lender. “The SBA 7(a) program provides the flexibility to finance business transactions that traditional lenders might not underwrite, due to lack of collateral or a limited track record.”
The consequences of a lack of credit reveal how important access is to businesses. Many businesses rely on credit not just for capital improvements and start-up costs, but to meet everyday expenses such as payroll. Large companies have no problem attracting creditors; for smaller businesses, lack of credit can sound the death knell. Jon Novak, CEO of Boomerang Transportation, offers a firsthand example:
“Being new to the market, we had no name recognition and, more importantly, no credit. We almost went bankrupt having to pay truckers in advance and wait 30 days to get paid by our clients.”
Consumers without credit can find themselves in a hopeless situation. For low-income households in particular — those households most likely to have either bad credit or no credit whatsoever — this often drives them to predatory lenders and payday loans.
Short-term, high-interest lenders often skirt beneath federal regulations and charge usurious interest for the privilege of credit. In the absence of other options, consumers feel forced to accept these loans to pay for emergencies or basic needs, and thus find themselves in a cycle of debt that exacerbates money difficulties.
In addition to the SBA 7(a) program, other lenders and initiatives have arisen to widen credit access. Beneficial credit terms require a credit history; those without access to credit cannot build a credit history, and historically have had few options beyond secured credit cards and predatory loans.
Alternative credit scoring models provide another means to broaden access to credit. Older models require that an individual has, at least, one active credit account that shows activity over the previous six months. Newer models take into account a much broader range of criteria, and therefore, allow lenders to serve a much greater number of borrowers.
So, what does access to credit mean? It can mean the ability to own a home, purchase a car, or get insurance; for a business owner, it can mean paying employees on time, or capitalizing on a growth opportunity; for some people, it means paying the rent or buying groceries.
Whatever your needs, accessible credit should remain a possibility. As more lenders realize this, the availability of affordable credit can become less of a privilege, and more of a consumer right.
Doug Matus is a freelance writer who frequently contributes to the Self blog.