Two weeks ago, I wrote about how credit scores affect our financial lives. A number of you who read that column have called me and pointed out how difficult it is for sub-prime consumers to improve their credit scores. They are absolutely correct. Some areas of consumer loan laws need to be changed.
Some 91 million adult Americans were classified as sub-prime in a 2006 Rutgers University study. That is equivalent to the total population west of the Mississippi River minus Texas. That is far too many people to be shut out of lending markets, which, could improve their credit scores.
Unfortunately, many state and federal laws and regulations make access to credit for consumers with sub-prime scores difficult or even impossible. Without access to credit, consumers cannot establish credit, nor can they rebuild credit that has been damaged.
Due to FDIC requirements, banks are limited in their ability to offer loans to consumers with low credit scores. Many state laws restrict sub-prime consumers to loans from pawn brokers, payday lenders or title loans.
While these loans may adequately serve the needs of consumers who need cash in an emergency, they do not help those who also want to improve credit scores, because these loans are seldom reported to credit reporting agencies.
A common interest rate cap in some states is 36 percent, which may seem reasonable, but should it be applied to small, short-term loans? At 36 percent, the total fee charged on a $100, two-week loan would be $1.38.
Short-term lenders who offer loans to high-risk consumers could not cover the cost of originating a loan, let alone meet employee payroll and benefits and other fixed business expenses. Consumers with sub-prime scores need more credit score enhancing options.
The national average credit score is 692.
Over two-thirds of the 25 states with the highest average credit scores are also states with the highest per capita income. For states that are serious about improving their citizens’ per capita personal income, focusing on improving credit scores should be a priority.
Legislators should set forth a minimum set of parameters to establish loans for the purpose of credit enhancement. They should take pro-active financial literacy measures to educate citizens in order to improve their credit scores. Georgia is one of 40 states which require that either economics or personal finance be taught in high schools; however, Georgia is also one of 14 states seen as having overly restrictive laws that prohibit many credit challenged consumers from accessing credit.
When I was teaching at NGCSU, I was a member of the Georgia Council on Economic Education, which publishes The Word on Economic Education.
The Fall 2008 issue of The Word reports that the National Council on Economic Education ranks Georgia number one nationally in three areas: number of teachers participating in workshops, number of workshops provided and training program hours provided.
If this ranking with the NCEE translates into increased student literacy, future Georgians may see an improvement in credit scores and higher personal wealth.
President Bush has recently created the Advisory Council on Financial Education. The Council has the stated goal to “educate people from all walks of life about matters pertaining to their finances and their future” and has recently developed a financial literacy challenge. Students scoring in the 25th percentile of the nation’s scores will earn certificates of recognition from the U.S. Department of the Treasury. Students scoring exceptionally well will win a 2008 National Financial Literacy Challenge Medal. I am sure that there are students in the Dawson, Forsyth and Lumpkin County school systems up to this challenge.
One of my priorities in the next Session of the Legislature is to work for legislation that will help you improve your credit scores, establish credit, become eligible for credit at affordable rates and rebuild credit that has been damaged.
Let me know what you think.
I can be reached at 689 N. Chestatee Street, Dahlonega, GA 30533, (706) 864-6589, e-mail firstname.lastname@example.org. Or contact Gerald Lewy at (706) 344-7788.