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Credit unions must step up financial literacy efforts

Lately it seems that a new statistic is released every week about the financial insecurity of U.S. households — 40% don’t have $400 in emergency savings, 36% are unable to pay their bills on time or 32% have a debt in collections.

This stream of information is daunting even for those of us in the community development field. We wonder: What more can credit unions do to improve our members’ financial health in the face of troubling national trends and the very real challenges facing an increasing number of members?

Now we have an encouraging answer: Credit union financial products, paired with financial counseling, have a measurable impact on improving members’ financial health. What’s more, we’ve found that financial counseling, which has long been seen primarily as a “charitable” activity, helps credit unions responsibly grow their lending and yields a positive return on investment.

In the fall of 2015, Inclusiv and Neighborhood Trust Financial Partners came together to launch Pathways to Financial Empowerment. In the three-and-a-half years since its launch, the initiative has expanded to 20 credit unions in 14 states, serving over 6,000 low-income people across the U.S. The Pathways platform not only enables credit unions to measure the impact of their counseling sessions, it also provides new insights on the impact that credit union financial counseling and products are having nationally.

Our research has revealed a few key findings:

First, financial counseling reaches and supports the most financially vulnerable segment of a credit union’s membership. Pathways clients are primarily hourly workers with an average income of $33,726. Most clients have subprime credit scores, with an average score of just 601.

The majority of clients are people of color, and a slight majority are women. In other words, the people who receive financial counseling represent underserved populations who would otherwise struggle to access affordable financial products were it not for their credit unions.

Secondly, Pathways credit union financial counseling is effective at improving financial health. Fifty-eight percent of clients improved their credit score by an average of 38 points after participating in Pathways counseling. This level of improvement not only helps people access credit, but also can increase job and housing opportunities that often use credit to determine eligibility.

Plus, Pathways clients decreased harmful debt: 60% of Pathways clients reduced the amount of debt they have in collections and 48% reduced their general consumer debt, which is often very high cost.

Third, financial counseling helps credit unions responsibly lend to low-income, subprime borrowers. Pathways credit unions made nearly $22 million in new loans to over 1,500 financial counseling clients, and these loans are performing. These borrowers have just a 3% delinquency rate, which is particularly impressive considering that the majority of these borrowers have subprime scores.

Further, Pathways credit unions are expanding access to affordable credit to their members. On average Pathways auto borrowers saved $1,000 as a result of better rates from their credit unions versus market rates for subprime borrowers. This lending is a win-win: Credit unions grow their lending and members benefit from safe and affordable loans.

Finally, financial counseling is an important tool to grow a credit union’s business and can provide a positive return on investment. We conducted a deeper analysis on the return on investment for financial counseling at Pathways credit unions and found that two out of three credit unions had a positive return on financial counseling. Though research is ongoing, we’re finding that financial counseling is increasing lending, share of wallet, member loyalty and brand recognition, all while serving the most underserved communities.

With the financial challenges facing many households and diminished trust in mainstream financial services, credit unions have a critical role to play in ensuring access and equity for underserved consumers. Financial counseling is an important tool credit unions can use to reach and serve financially insecure consumers both in their existing membership and their broader communities.

The moral case to deliver financial counseling is stronger than ever — and our Pathways data is beginning to make the business case. Now is the time for credit unions to step more assertively into financial counseling delivery and become the financial health leaders our communities need.

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