It may seem counterintuitive to allow low-income Tennessee residents to go into debt in order to build credit. However, it is a new type of loan that is being offered in some communities to allow people to establish credit – something that virtually everyone needs in order to buy a home or car, or even rent an apartment.
Many people do not have the income to even qualify for a basic credit card. But some new types of loans allow people to borrow money – but not spend it. The money – several hundred dollars or so – is put into a locked savings account. It sits there until the loan is paid off. Some loans allow the account to grow. For example, if a person pays $25 toward the debt, that money may be put into the savings account. So it is possible for $300 to turn into $600 by the end of the loan terms. In addition, the person’s credit score will increase dramatically – in many cases, close to the United States average of 689.
Those without credit – or who have a low credit score – pay more for everything. Even if they have saved up more money than someone with a high credit score, the one with the higher credit almost always wins out.
Credit card debt – within reason – has some benefits. It allows a person to responsibly build credit, making it easier to buy high-cost items. The key is to not drown in debt. Once a person has several thousands of dollars in debt, it can be difficult to recover.
Source: New York Times, “How Credit-Card Debt Can Help the Poor,”Shaila Dewan, Feb. 11, 2014