Building that credit score, one loan at a time

November 1, 2012

Photo courtesy of Ways to Work
Establishing good credit is key for families wanting to qualify for car loans.

Bronzeville resident Kelly King works as a security guard downtown. She has two kids: her daughter just started college and her son is in the eighth grade.

They had a car up until last year. But then, Kelly’s daughter had a chance to go to Italy and France for her senior trip. Her car payment was $305 a month. But she was juggling that with making payments on the trip, and as she said, “pretty much had to choose”.

“The car ended up getting sacrificed for her trip, for school,” King said. After she missed four payments, they repossesed it.

Stories like King’s aren’t uncommon. Low-income people with bad or no credit have another problem - they can only get auto loans from “buy here, pay here” lots - the ones that advertise anyone can get a car, no matter how bad their credit. Those interest rates can be as high as 30 percent.

Enter Ways to Work. It’s a Milwaukee-based nonprofit that provides working families with low interest car loans. Along the way, they help their clients build better credit.

The first step is attending a financial class.

Kelly was one of about a dozen others this Saturday afternoon inside a community center on 43rd Street and Martin Luther King Dr., on Chicago’s South Side.

The Salvation Army’s Peter Gonzalez is standing at the front of the classroom, armed with an overhead projector displaying a powerpoint presentation and a whiteboard he’s using to write on with a blue marker.

“First and foremost, you always, always, always want to pay your bills on time,” he said, as he explained what goes into someone’s credit score.

Ways to Work partners with local social service agencies like the Salvation Army to provide loans. Client are all working families, typically living at or below the poverty line, with poor or no credit. Since 1984, the program has helped 32,000 families and provided more than $63 million in loans.

What’s different about these loans isn’t just the rate - eight percent - but the process.

Loan recipients have to go through a few steps in order to qualify for the loan. The first is to attend this class, where they learn about not just loans, but credit scores. And, they work with a loan officer like Peter Gonzalez, who functions more like a case worker and a personal finance coach.

As the class ends, people - including Kelly - sign up to make an appointment to start a formal application with Peter in a few weeks.

Inside his office near Midway Airport, it feels cramped. That’s because his small desk is surrounded on three sides by large filing cabinets, stacked in some cases two deep.

The program isn’t easy. There’s a lot of paperwork to fill out to get a $5,000 or $6,000 loan. And if your credit is wrecked, that has to be worked on before you are approved.

Judging by these filing cabinets, many don’t even get to step two. Take Kelly King. Even though she initially made an appointment with Peter after that Saturday class, two weeks later, she canceled, and hasn’t rescheduled.

But Kiana Whitehead has make it this far. She is focused on getting back to being a car owner.

“I had purchased a car, I had a car note,” she said, as she waited for Peter to finish up with another client. “It was kind of a lease to buy type of thing.”

Kiana Whitehead’s 32. She lives in South Shore with her 11-year-old son.

“At the time I was desperate so I just took whatever offer they gave me, and I wasn’t really educated on interest rates and principal and any of that. I just needed a car, so they approved me and I just took it,” she added.

Kiana had put down $4,000 on a 2008 Honda Civic she bought in 2007. Her payment was more than $400 a month. At the time, she could afford it with her job as a hotel front desk clerk. But then her hours kept getting cut, and she lost her job. And like Kelly, she had to make a choice.

“It was either the car or the apartment,” she said, simply. “And that’s more important - me having a roof over my head.”

Now, she gets up at 4:30 a.m. to take the bus her son to her mom’s house, who helps get him to school. Then Kiana gets back on the bus so she can make it on time to her security job downtown. In all, she spends three hours a day on the bus.

When Peter does the calculation for how much time she spends commuting, it comes up to 30 hours every two weeks. Basically, same amount of time you would spend at a part-time job.

“This is why you need a car,” he said to her.

Peter and Kiana first go over her budget, and they find that her income is enough to qualify for a $5,000 loan.

But then they tackle her credit report. Kiana’s shows not just the Honda that was repossessed, but other small debts. More than a few are because she’s let family members use her credit to get things like cable, then not paid the bill, or because her child’s father didn’t pay medical bills he was supposed to cover.

Peter tells her that she’ll need to start working on paying those off in order for the loan committee to approve her application. Kiana’s not happy.

“When do you expect me to pay these?” she asked him. “Because I won’t be able to.”

Peter told her he understood she couldn’t pay it all off right away. But he explained the loan committee likes to see applicants have a plan to improve their credit, so they’ll pay close attention to what she’s doing to clean up the debts, especially those under $200.

When Peter leaves the room to make more copies, and Kiana wonders out loud about how stressful the process is.

“This program is supposed to help people whose credit is not in good shape,” she said. “And it’s like, they’re still giving me the same pressures as I get from trying to get a normal loan.”

Ways to Work President Jeff Faulkner said he knows this is a hard process. But he sees that credit score as “the biggest barrier to economic mobility”.

“That’s why we focus so much time and attention on that credit score, and helping them to understand how they can make it better,” he said. “The changes in behavior, the changes in habits, the activities that they need to take to do that - and that probably even more than the car itself gives them more economic mobility.”

Ways to Work’s research shows their work has made a difference.

The nonprofit’s default rate is about 10 percent - that compares to about a 35 percent default rate for loans from buy here pay here lots.

Last year, Ways to Work did a study of clients who have paid off their loans. Nearly half have received a promotion or raise. One quarter have gotten more education. And more than two-third of clients who had received government assistance no longer need it.

It’s not an easy road to get there. After meeting with Peter, Kiana decided not to apply for the program. She told him she has too much going on with her family to continue with her application.

A year ago, Jessica Rodriguez was where Kiana and Kelly were. She attended the financial class and then had her first appointment with Peter.

“And they told me, it’s not that you have bad credit, or good credit, you just don’t have credit,” she said.

Jessica’s 27. She’s a home health care aide, so needs a car for work. She had been driving a ‘99 Chevy Suburban some family here gave her. But the gas was expensive.

“I mean, $20 wouldn’t last for a day,” she said. “In a week, I was putting $120 - just to get me to work.”

Jessica makes about $275 a week. She has one client during the week and two others on weekends.

One of the families she works for saw a newspaper ad for Ways to Work. A year later, Jessica is halfway through paying off her car - a 2001 black Honda Civic she proudly shows off.

“I like [it] so much, it’s so small and so comfortable,” she said.

Her gas bill has been cut in half - a big help to the family’s finances. But not that’s the only change this year. She’s started taking classes to get her G.E.D. Once that’s set, she’s also researching banks to in order to accomplish her ultimate goal: owning a house. She says this first loan has helped in way she didn’t think it would.

Before her first car loan, she didn’t think she could do anything of this. But now, she said, this whole process has “helped her believe in something”.