Accessible credit is essential for many reasons in today’s marketplace. For one, having access to credit makes it easier to purchase a car, which greatly facilitates employment, job retention, and overall earnings – especially among low-income households.

However, individuals who have poor credit pay higher prices for their vehicles, or worse, they are denied access at all. FICO recently estimated that 20% of individuals with a credit score still face the added costs of poor credit. Furthermore, this excludes the nearly 20 million Americans that the Consumer Financial Protection Bureau estimates live without a credit score.

Such a substantial proportion of the population would greatly benefit from interventions to establish or rebuild credit, but doing so takes time and resources. While many financial institutions offer credit building products such as secured credit cards or loans, uptake of such products is low because potential beneficiaries struggle to put aside enough savings for the down payment. Therefore, finding ways to rebuild credit may be beyond someone’s reach if they work a low-wage job or struggle to make ends meet.

To help address this problem, we partnered with IH Mississippi Valley Credit Union (IHMVCU), a credit union serving a large population of low- to moderate-income earning families in Iowa and Illinois. Through their Reliable Rides program, IHMVCU is able to connect sub-prime, indirect borrowers with credit. Since the program targets sub-prime borrowers, Reliable Rides offers an opportunity to tailor interventions that could help this specific population to build savings and to take steps towards rebuilding their credit.

Behavioral Diagnosis and Key Insights

In order to better understand the experiences of Reliable Rides members, we interviewed five loan recipients, as well as two staff members at a car dealership, where most of the loans are initially offered. We rounded out the qualitative work with interviews of credit union staff.

We built on this information by reviewing academic literature, creating a behavior map, and analyzing transactional data from IHMVCU. From these data sources, we identified three key insights:

1. Reliable Rides members treat savings as “what’s left over,” meaning they feel like any savings they put aside for the future comes at the expense of current consumption.
2. Many Reliable Rides members overpay on their car payment as a way to pay off the loan This overpayment is likely misplaced – the amounts they overpay are too small to significantly shorten their loans. Furthermore, overpaying draws from funds that could be potential savings.
3. Most Reliable Rides members know they have poor credit histories and many already value their auto loan as a step towards rebuilding their

Experiment

Based on these key insights, we helped IHMVCU to design a new program called Stepping Stones Savings (S3). The S3 program is designed to encourage Reliable Rides members to redirect a behavior many already engage in – overpaying on their loans – towards building their credit and short-term savings.

Overview of S3 Program

We designed a randomized controlled trial which varied the type and degree of outreach. All new loan recipients were randomly assigned to one of three conditions.

We hope this experiment can help us answer three key questions:

1. To what extent are payment-based savings programs able to increase access to credit-building products?
2. Is there existing demand for payment-based savings programs and does connecting such programs to salient goals (i.e. credit building) change demand?
3. What is the return on investment (ROI) of costlier outreach methods on program enrollment?

Results

The experiment launched in October 2017. To date, we have seen enrollment rates of 3% and 6% between the two treatment groups, respectively.

In addition to uptake of the product, we are tracking the total amounts saved by all participants. We are measuring performance on the auto loans to see if connecting the loan to credit building improves repayment. We are also conducting soft credit pulls every three months for the first year and every six months afterwards to track how the program affects participants’ credit scores.