For the last two years, Frederick F. Wherry, an economic sociologist, has studied how people who were “invisible” in the financial system establish a financial identity and how those who are “under-banked” begin to enter the financial mainstream. Wherry is a professor in the Department of Sociology and the co-director of the Center for Cultural Sociology. In 2014 he was elected chair of the Section on Consumers and Consumption at the American Sociological Association.
Yale News sat down with Wherry to discuss his area of expertise and to learn more about the challenges facing low- and moderate-income households that either don’t have a credit score or have a very poor one; why is there so much inequality in who has a bank account, a credit score, and low-cost credit opportunities; and his view of the most promising solutions. An edited transcript of that discussion follows.
Who are the “credit invisibles”?
Credit invisibles are people who engage in credit-worthy activities — such as paying utility and phone bills — but do not have enough of this information reported to credit agencies to be considered “scoreable.” For this reason they tend to have incomplete or non-existent credit histories, as information from utility companies is generally not shared. They are invisible because we are not looking for them, not because they are unworthy of credit.
How many people are in this category?
According to the Policy Economic Research Council, approximately 35–54 million Americans fall into this population, making this a significant, (but quiet) social justice issue. In an overlapping (but not identical) population, 8.2% of U.S. households are “unbanked” — they don’t have a checking or savings account. Another 20.2% are “under-banked” — they may have a bank account, but use alternative financial services such as payday loans, pawnshops, or refund anticipation loans. This affects more than 30 million households; 55% of black households are un- or under-banked, as are 49% of Hispanic households.
There is a misconception in the popular press that somehow people are getting into debt because they spend irresponsibly, such as buying a big television. The reality is that people have emergencies. If you look at a lot of the spending portfolios you see medical debt. In the 2011 Survey of Consumer Expenditures, families with stagnant or falling incomes were spending more on the basics, such as education, childcare, healthcare, transportation costs, and mortgage payments. Spending on television, computers, and many other non-essentials fell. Joseph Cohen recently reported on this in the “Journal of Consumer Culture.”
What are the consequences for them?
Most people don’t realize how important it is to have a credit score. It is getting harder to rent apartments or to get some jobs without one. Also, think about how much more a low- to moderate-income person has to pay to access the same goods and services as someone else with a similar income but with a good credit score. Over time, the disadvantages accumulate and inequality grows. And it’s not a one-time problem. Often, people are passing those debts along to their children, who are trying to go to college or start their own families.
"Most people don’t realize how important it is to have a credit score. It is getting harder to rent apartments or to get some jobs without one."
How does this affect the U.S. economy?
If a large percentage of your income is going to transaction costs, that’s money you’re not putting into consumption. If every time you’re making a transaction you’re losing 15%, 20%, 30% on it, you’re not saving or spending it in some other way.
This is the sleeper social justice issue of our time. How many sub-prime households do we need to have before people are ready to talk about this? What about students trying to access higher education who are finding themselves financially strapped and stigmatized in the financial system? That’s a hard way to start life.
How have you been researching this issue?
For the last two years I’ve been studying a non-profit in California that was being praised for its social innovation. The Mission Asset Fund (MAF), located in San Francisco’s Mission District, is trying to help people who don’t show up in the credit system at all, or who show up with poor credit scores but are engaged in credit-worthy activities.
MAF recognized that many communities, in particular immigrant communities, were saving money and extending credit to one another through rotating savings and credit associations outside the banking system. This helped them get credit in their neighborhoods, but didn’t help them get a foothold in the mainstream financial system.
MAF has formalized these rotating credit associations. They host lending circles through their organization and report the positive paybacks to Vanguard and Experian. For people who weren’t showing up at all, their entry into the financial scoring system is now with positive payment reports.
The executive director at MAF, José Quiñonez, is also chair of the consumer advisory board to the Consumer Financial Protection Bureau. He is in the middle of this world of financial innovations. They’re showing that systems we think of as pre-modern financial services — such as rotating credit associations — can stand alongside modern financial tools.
What other approaches are there to helping credit invisibles?
Something MAF has tried to do is to come up with more realistic financial education. One of the difficulties is that learning about money in a classroom is difficult to link to your everyday practices.
I’ve observed people who come to information sessions, financial education workshops, and lending circles. Some have said they are made to feel ashamed when they try to go to a bank, or it was bewildering. It really helps to have someone in that same meeting say, “That happened to me, too, but …” and provide the name and location of a bank that helped, whom they spoke to, and the needed documentation. To get information from a source who looks like them and has had their experience helps in terms of making them feel confident that if they make another attempt there might be some kind of positive result.
Another option is to design products and services that align better with habits people already have. Research has shown that the incomes for this population are both low and volatile, fluctuating from month to month. People may have one job one month and two or three jobs another month. These households are trying to save consistently, but are doing so with instruments that don’t help them very much.
The other big issue right now is to make sure that non-profits offering these services have some kind of regulatory clarity about being able to provide small loans. The California Senate recently passed a bill exempting non-profit organizations making zero-interest loans between $250 and $2500 from several regulatory and training requirements. For a lot of families $250 is the difference between being able to pay bills or not. The bill is now in the California Assembly with the Standing Committee on Banking and Finance and is expected to pass.
"People need to be able to practice credit-worthy activities in a safe space where they can learn and it’s okay to make the occasional mistake."
What is the most promising answer?
There’s no magic bullet. I support public-private innovations as well as laws that make it easier for people to access financial products. Responsible experimentation is important, as is appropriate financial education that feels respectful to the consumer. It’s important to figure out what are culturally appropriate services that people understand and formalize them so that people can get the optimal benefit from things that already feel familiar.
A lot of households need liquidity more than anything else to get them out of going to payday lending. If we know that people’s financial rhythms are somehow seasonal, can we think about designing messages and products that are in line with that seasonality?
People need to be able to practice credit-worthy activities in a safe space where they can learn and it’s okay to make the occasional mistake. It’s also important to think about how we expand offerings like the new myRA (to get low- and moderate-income people retirement accounts), individual development accounts, and the lending circles.
On the policy side, the Credit Access and Inclusion Act (HR2538) — a bill currently in committee — would allow utility companies to share positive consumer credit information to credit scoring agencies and credit card companies. By doing so, activities that are currently invisible in the financial system could be brought to light, enabling people to get better terms of credit. The challenge is that it’s hard to get people excited about credit invisibles and regulatory clarity. You see eyes start to glaze over when the subject of credit worthiness comes up.
What would you ultimately like to see happen?
I would like to see more investments in these innovative social experiments that are trying to get people better banked — also, much more public awareness about the consequences of having a poor credit score and the consequences of being shut out of the credit system, not only for yourself, but for your entire family. Especially as we think about these individuals who didn’t do anything extraordinary. What deemed them unworthy of being able to get a good interest rate? They happened to have a family member fall ill. Or, they rely on their car to get to work and the car broke down. Right now people who are under-banked are squeezed between the banks and the payday lenders without much in between. Low- and moderate-income families need more, not fewer, financial options.
What do you hope your students will learn?
There are days when I realize that this is the first time some of my students have had to question what they thought they knew about markets and society. I walk into the classroom with two words of advice, “Practice skepticism and be precise.” I try to do this in my research. And my students tell me that they enjoy seeing me grapple with my own findings and the findings of others. I ask them, “Can we do better than this”? The answer is often yes. When students combine reasonable skepticism with a respect and joy for discovery, I have done my duty.