'Credit invisibles' often forced into crippling payment plans

Low-income Americans with no access to credit who believe that they are out of options in terms of financing their purchases are often bound to long term payment plans with crippling interest rates. 

A whole industry has sprung up around providing the poor working class with a channel through which products that were previously unaffordable become available, The Washington Post explained. The economic recovery has lasted five years, and in that time retailers have grown more willing to work with low income individuals in order to set up payment plans that allow them to afford items typically associated with middle class lifestyle, but at a burdensome cost. 

The business of charging individuals with exorbitant interest rates over long periods is similar to the sub-prime lending boom of the early 2000s, though while rates in that case were between 5 percent and 10 percent, people are paying off products from rental centers at effective annual interest rates of over 100 percent, according to the publication. These rent-to-own stores categorize transactions as leases, which allows them to skirt laws that would otherwise make the practice of burdening low-income individuals with debilitating interest rates. 

Over 50 million Americans have no access to credit
David Bornstein, in The New York Times' opinion section, compared credit scores to a license that Congress has implemented - a requirement in order to purchase a house or get a job in America. In the U.S. there are approximately 54 million people with no credit standing. Just because they have no score does not mean that they are unreliable individuals though, he noted. 

These "credit invisbiles," as Bornstein calls them, are mostly young people, minorities and immigrants. He wrote that many of these people have been paying utilities and phone bills consistently, but because those transactions aren't counted, they don't have good credit scores. 

"Tens of millions of people are misclassified by the system, at the hand of prejudice or any other number of factors," said Arjan Schutte, the founder of Core Innovation Capital, according to Bornstein. "It's a social problem but it's also the basis for a commercial opportunity: not to give a fraudster a loan, but to give someone who is deserving a loan. And so many people who are deserving are misclassified."

At Buddy's Home Furnishings, a rent-to-own chain quickly spreading through the South, Cullman, Alabama store manager Angela Shutt told The Washington Port that about 75 percent of the items purchased are returned. 

"I've never seen a customer base or an economy like this," Joe Gazzo, president of the company, told the publication. "You may have five people open an account in a day, but five people return in a day. You almost become like a Blockbuster."

These days, conventional banks are highly reluctant to court risky borrowers following the sub-prime lending crisis. This has cut-off millions of American from access to large loans - leading many to turn to rent-to-own stores such as Buddy's in order to furnish their homes. 

If "credit invisibles" turned to alternative credit scores, which take into account the payments that many with no access to credit stick to so well, such as utilities, than they would likely have easier access to furnishings without having to turn to rent-to-owns stores. Credit agencies such as PRBC take into account data points that traditionally aren't considered, in order to create a better picture of individuals' creditworthiness. 

There is a large group of people working to fix credit scores today, Bornstein wrote, in the government, in the nonprofit sector and among business owners. If more "credit invisibles" were aware of alternative credit scores, they likely wouldn't be forced into crippling payment plans just to furnish their homes. 

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