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Informal lending can boost your credit score

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Bertha Jimenez moved to the U.S. from Mexico with her parents when she was 9 years old. She went to college for two years, but dropped out when she got pregnant. Now, she wants to establish credit for the first time so she can get her own home. She says her daughter is “already dreaming of having her own house" for them to share and getting a pet.

To build her credit, Jimenez is joining eight others in a formalized lending circle at the Mission Asset Fund in San Francisco. Here's how the program works: The members come together and agree on a payment amount per month, usually $100 per person for the first lending circle.

Every month the organization auto-deducts the payments from everyone's accounts to form a loan, which is given to one person in the circle. The loan travels through the circle until everyone has received it and paid it off. There is no interest, and at the end everyone gets back exactly what they put in. The hardest part of the whole process is deciding the order of who receives the loan. To do that, Jimenez and the others pull numbers out of a hat. Well, in this case, a plastic cup.

Lending circles exist in countries all over the world. Unlike most informal loans, Mission Asset Fund guarantees these ones and reports the activity to the credit bureaus. The circles can have a big impact on credit scores. Anna Rivera from El Salvador says her score improved almost 150 points since she started lending through the program four years ago. She lost her home during the recent financial crisis, but now that she has rebuilt her credit she is looking to buy a new one.

Since it began five years ago, Mission Asset Fund says it has processed over a million dollars in loans without a single default. Like traditional lending circles, the program relies on community bonds to keep people paying. Most of the members have a shared experience living as an immigrant without credit in the U.S. Some are friends and family who will actually chip in if another fails to pay. Others have just met for the first time. To break the ice, the future lenders and borrowers meet up for a social event. Jimenez and the others get to know each other over a dinner of papusas and coleslaw.

Mission Asset Fund never asks members to prove their immigration status. To enroll in the program, applicants only need a valid ID, checking account, proof of income, and a federal tax number, all of which can be easily attained by undocumented workers.

Bruno Rivas and his wife, Micaela, are one of the program's biggest success stories. With credit they built through the circles, the couple opened a printing shop in the neighborhood. They have since been able to get loans for new equipment like a T-shirt printer.

When Rivas and his wife first arrived here from Mexico, they could not get any funding to open a business. Every bank they visited turned them down. They worked odd jobs for a decade before discovering the lending circle program. At first, Rivas was skeptical of the Mission Asset Fund. He says there are lots of scams in the neighborhood that target new immigrants. Many people he knew were taking payday loans with massive interest rates, often several hundred percent a year. He and his wife were desperate for credit,  so even though Rivas had reservations, they decided to give the lending circle program a shot.

The couple started a small lending circle and after six months they started to see an improvement in their credit scores. Rivas says it is still a bit of a shock to be able to get financing. He recently secured a loan for a car in only a couple of weeks. “They called me and says your credit is OK, you have [a] good report on credit score, and I said 'wow I'm really surprised!'”

The bank told him he could get any car he wanted. So he traded in his old gas guzzling Chevy Silverado for a Toyota Prius. He says his kids are happy he is doing something for the environment. In the meantime, he estimates he is almost saving enough just on gas to make the monthly payments.

About the author

Sam Harnett is a reporter and contributor to Marketplace.
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