Grace.
Posted by Denise Wymore on June 18th, 2008
When Brent asked me to be a guest blogger, I initially was writing a post on my love of NPS. But in the past week have had the opportunity to spar with Ron Shevlin again on the subject, so you can go there for that.
Then I read Doug True’s guest post. What’s on his amazing mind. It got me thinking. I just celebrated my 28th year in the credit union movement. If you told me 28 years ago that I’d be a guest blogger on Open Source CU—huh? There are about four words in that sentence that didn’t exist 28 years ago.
So, what’s on my mind?
I’m in Oshkosh this morning. Watching the news.
I just heard my copy of USA Today drop in front of my door.
Open it.
Front Page: How Rising Home Values Placed your Finances at Risk.
Hmmmmmm…you mean all of the VISA Home Equity cards weren’t a good idea?
It goes on to say….”Banks urged owners to borrow more, based on ‘phantom equity’ that has vanished.”
Flooding Threatens Outdated Levees
I am seeing tons of evidence of last week’s flood in Oshkosh. Very sad.
Sports: Hmm. Celtics won. Probably not the best choice for the announcement:
“Celtics Reign, End Drought.”
Money section: Banks Raise Penalty Fees for Clients’ Overdrafts.
Too depressing.
Let’s see what my google alerts give me. Ahhhhh…...Grace.
What a beautiful word. Grace.
Rita Haynes, CEO of Faith Community United Credit Union appeared in the Dallas Morning News yesterday. “Give Credit Unions the Credit They Deserve ” was the title of the article.
They have created the “Grace Loan” – a small, short-term loan that requires the borrower save a portion of what they would have given to the payday lender in fees, thus teaching them good financial habits and helping build a credit history for their goals.
It got me thinking about the history of credit unions. Our purpose in society. Our cause.
Grace: Pay day lenders are charging interest rates that can reach 400 percent and cripple those who are least able to bear the consequences of debt.
History: The first credit union in North America, the Caisse populaire de Lévis in Quebec, Canada, began operations on Jan. 23rd, 1901 with a ten cent deposit. Founder Alphonse Desjardins, a reporter in the Canadian parliament, was moved to take up his mission in 1897 when he learned of a Montrealer who had been ordered by the court to pay nearly $5,000 in interest on a loan of $150 from a moneylender.
Grace: While payday lenders are geared to take advantage of the poor, credit unions – with investment pools of money formed by members themselves – are geared to help the working class or low-income families establish good credit.
We counsel folks to take loans that are appropriate for their circumstances and in this way protect their members from crushing debt and encourage a habit of savings.
History: Credit Unions were chartered to make loans for provident and productive purposes only.
Grace: We teach someone how to plan and save and become a good credit risk.
History: Credit unions were chartered to promote thrift.
Thank you Rita.
Denise is a rambunctious Culture Consultant. Her goal is to help credit unions question everything and to renew their faith and their commitment to the credit union brand. Read more from Denise on her blog Cult-ivation .
Denise, that product is a fantastic example of a credit union serving as an advocate for its members. Do you think you could talk Rita into sharing more details that the Dallas Morning News audience might not have been interested in but that could provide OSCU readers with more info on how to offer something similar to this at their credit unions?
What an awesome product. I know that several credit unions have had the idea of swaying people looking for short term loans away from payday lenders with the idea of “they are going to do it anyway, shouldn’t they do it here instead of at a payday lender.”
I have to say that this might be the first real effort to do this that has an element geared toward changing that persons financial habits to something less destructive. Its a wonderful example of advocacy.
Right on, Faith Community United Credit Union, keep up the good work!
Bravo.
Matt,
I just emailed Rita to see if she could join this conversation. Stay tuned.
This is really good stuff.
D.
ACQUIRING BANK LOANS
This is one of the most important steps in this program. By the time this step is completed you will have three excellent credit references to place on your next credit application. Why is this important? The next time you fill out an application take notice on how many references it asked for. They usually ask for three. The “Three Bank Maneuver” is designed specifically for that reason. This method of credit building is perhaps the finest way today of obtaining beginning bank credit. Instead of Banks, you can also use Savings and Loan, Credit Unions, or even a combination of all three.
To operate this maneuver you will need some beginning cash. Use as little as $1,000 or as much as $5,000. The more you use the better. It is important to remember that this money will not be spent. It will be kept as security in a savings account until you are through using it. We recommend that you start with $1,000.
LOCATE YOUR BANKS
The first thing you need to do is locate your three banks. Get your local yellow pages and call around. Ask for the loan department and ask the following questions. What is the yield on savings accounts? What is the minimum a bank will loan on a passbook savings account? What is the percent you can borrow? You must also ask what credit bureaus they subscribe to, and if they report automatically, and if so, how often.
Once you choose your three banks, the first step is to go to “Bank A” and open a passbook savings account. (Do not put money in any other type of an account, even if it does pay a higher rate of interest) Take your passbook home and wait three days. Then return to “Bank A” and ask to see a loan officer. Look your best, be courteous, and explain that you wish to take out a loan for which you are willing to place your passbook as collateral. This is the easiest type of loan to get because it is totally secured with cash. Most banks are willing to loan you 85% of the amount you have on deposit. When you take out your loan your savings account is frozen, however, every time you make a payment you unfreeze an amount equal to your payment, less a few dollars for interest. Be sure to ask that the loan be for at least one year, with minimum monthly payments. Do not get a simple one year loan with no payments. This will serve you absolutely no benefits whatsoever. What we are trying to establish is a payment history. You will not be turned down for this type of loan no matter what your previous credit history is and in most cases it will not even be checked. If you have bad credit, make sure you tell your loan officer before he pulls your credit history. Tell him you are trying to re-establish your credit, and that a good credit rating is very important to you now.
Once you have obtained your $850 loan (85% of $1,000) take your money to “Bank B” and open a second passbook savings account. Wait three days and go get your second loan. This time in the amount of $723. (85% 0f $850). Again be sure it is an installment loan of at least twelve months. Take the money to “Bank C” and open another passbook savings account. Wait three days and go get your third loan. This time it will be for $614 (85% of $723). You now have three bank loans totaling $2187 and $614 in cash. Now don’t worry! You might be asking how you are going to pay off $2187 in loans with $614, but it is easy. As we mentioned before, every time you make a payment, and amount equal to your payment minus the interest is “unfrozen” in your account. (Figuring an interest rate of 12% on that $79.33, $8.50 is interest charged). Subtract this interest from the $79.33 and you get $70.83. This is the amount of principal paid back. Since your savings account calls for a 15% cushion above your loan amount, when you pay the $79.33 you “unfreeze” $70.83 which can be withdrawn without disturbing your loan collateral.
THE PAY BACK PROCESS
By the time you get your third loan, your first payment will be approximately seven to ten days away on your first loan. At this time take enough of your $614 to make your first payment. Do this at “Bank A”, “Bank B”, and “Bank C”. At this time you are ahead of your due date by one week at “Bank A”, two weeks at “Bank B”, and three weeks at “Bank C”. You have used $205 of your $614, but at the same time you have unfrozen about $182 of your frozen funds which you can withdraw at any time.
Now wait about three weeks and go back and make your second set of payments. At this point you will be approximately a full month ahead on all your loans. With the balance of the $614, make your third payment at each bank on the second payment’s due date. Now you have spent the $614, approach each bank and withdraw the funds that have become unfrozen. This will be about $545. Once again use this to make your monthly payments, always one full month ahead of schedule.
Continue this process through the sixth month. You can pay off your loan in full after you have reached your sixth month or you can follow it all the way through. It is not advised to try to pay them off prior to the six months as six months is unofficially the minimum history allowed when considering an account as a possible credit reference.
Remember, the entire reason for this process is to establish your three banks as future credit references.
HOW MUCH DOES IT ACTUALLY COST?
In this example, the interest rate was 12%. However, the savings accounts were drawing 6%. This means your net interest cost was only 6%. The amount of interest charged for “Loan A” is $102. The amount of interest you will receive on your passbook savings account is $51. Therefore, we subtract $51 from the $102 and get a total one year charge of $51. This amount is only $4.25 per month. But since you are paying off the loan after making the sixth payment, your true cost is: “LOAN A” Six Months at $4.25 $22.50 “LOAN B” Six Months at $3.61 $21.69 “LOAN C” Six Months at $3.07 $18.52 TOTAL ACTUAL COST $65.61
That’s a small amount to pay for three references that you now have, and you still have your $1,000. It would be an excellent idea to contact your bank and ask what credit bureaus they report to. Contact the credit bureau and ask them to send you a “Credit Addition Form”. On this form you list the piece of credit to be added, and mail the form back to the credit bureau and they will do the rest.
Now, six months have passed, and the majority of your bad credit should have been erased from your credit file, and you should have three excellent credit ratings. You are now ready to go to the next step.
ACQUIRING VISA / MASTERCARD
If you wait until you have completed your three bank maneuver you should be able to get a Visa of MasterCard at just about any bank you wish. If you are in a hurry, it may be necessary for you to apply for a secured card.
Now that you have your credit card, it is time to go shopping. First of all, go to a jewelry store in the mall near you and purchase an item that is equal to near the maximum of your credit card. Be sure not to buy a sale item, and find out how long you have to return the item for a full refund. Buy the item on your credit card and enjoy it until you have to return it. Be sure to return it before the final return date. At this time they will issue you a credit memo for your credit card. What is interesting is that a credit to your card is the same as a payment, and it will show on your credit report as a high, a “0” balance, and a “as agreed” payment. Next, go to a bank and make a cash advance near the maximum of your credit limit. Do not spend the money, but wait until your billing date and make a prompt payment in full. There will be a small charge for this, but it will provide you with yet another rating, separate from the previous rating. Now you can go to Sears, Wards, Mervyns, or many other department stores, and by showing your Mastrcard or Visa, qualify for one of their credit cards.
HOW TO ADD YEARS OF CREDIT HISTORY IMMEDIATELY
The final item to re-establish your credit is probably the easiest. What is necessary for you to add years of excellent credit history to your credit profile, is the love and trust of a friend or family member who has good credit.
Each month when they receive their credit card bills, they are asked if they wish to add anyone to their credit card. By having them answer “YES” and adding your name, they will in fact cause a new credit card to be issued in your name. They will, however, be a co-signer on that account. Since even those who love you don’t normally want to jeopardize their credit rating, you should have them use their address on the application. When they receive the card, ask them to cut it in half, thus rendering it useless.
What will happen though is that by the issuing of the card it will automatically create an entry on your credit report, and instead of showing the application date, it will show an opening date of when the original card was opened and the entire credit history of that card. Therefore, without jeopardizing your friend’s or relative’s credit
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