An Added Benefit of Credit Building: the Savings Habit

By: Ricki Lowitz and Sharon Pomerantz

It’s no secret that Americans have trouble saving money. According to last year’s Federal Reserve Report, almost 50% of U.S. households can’t cover an emergency expense of $400. These people live on the financial edge, in constant fear of a car breaking down, a medical emergency, or a job layoff.

For decades, economists, human resources professionals and the financial media have been advising, then enticing and finally pleading with workers to save, with limited success.

Which is why new findings from Working Credit NFP on the intersection of credit building and savings are so exciting. While Working Credit’s goal has always been to help US workers improve financial health by establishing good credit and reaping its rewards, an unanticipated result of our credit building program is that many participants become regular savers.

When people are in pain because they can’t pay their bills each month, they don’t want to be lectured on the need to save. Instead, Working Credit explains how workers can lower monthly costs inflated by poor or no credit—so an auto loan at twenty percent interest becomes five percent; the insurance on that car drops by half, or their new credit score qualifies them for a better apartment at the same or lower rent. Hearing how credit building can reduce their expenses, they’re all in, and, for many workers, the fastest way to improved credit is through a credit builder loan, which requires them to save regularly.[1]

Through Working Credit’s CW-3 product, participants take a $300 credit builder loan, the proceeds of which go into a locked savings account. Their payments of $25 a month are reported to the credit bureaus, and at the end of one year they’ve not only improved their credit score, but they’ve also saved $300. Having proven to themselves that they can save on a regular basis, most want to keep going, be it through another CW-3 account, an IRA, or a 401K or 403B offered through their employers.

In other words, for many of our participants, credit building opened the way to a savings habit, and once they knew they could do it, they wanted to continue.

Look for our next newsletter focusing on the intersection of credit building and savings.

[1] A credit builder loan, which reports on time payments to the credit bureaus, is the fastest route to credit building for people with no credit score or a thin file (fewer than three reporting lines of credit),  To date, 45% of Working Credit participants fall into this category.

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