Credit Ratings and Community Well Being

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An interesting new tool created by the New York Federal Reserve delivers insights about consumer credit from a slightly different perspective than we’re used to – because the data isn’t just about your own personal credit in isolation, but how the way you use credit affects your community’s resilience.

The Community Credit project looks at the availability and quality of credit in an entire community, with data available at the county level across the United States, to help understand economic well-being that includes the consumer credit metric. The idea came to Fed economists after Superstorm Sandy hit the East Coast in 2012, and they noticed that affected areas in New Jersey recovered in very different ways that appeared to correlate with the quality of credit products – whether people had access to prime lending rates or subprime products, for example – the residents’ access to it, and how they used credit.  So they decided to take a look at what that credit means in communities all across the United States.

“The more people in a community who are able to access credit, the greater the ability to help the entire community move forward when times are tough—say, by redeveloping a dilapidated storefront, opening or expanding a business or buying a new home,” explains Kate Davidson in her Wall Street Journal post.  “Call it financial resiliency.” That resiliency depends on all members of the community – an interactive graphic provides a snapshot – and isn’t just about responding to a disaster or emergency. It’s also measure of the community’s levels of economic inclusion as well as its levels of credit distress, and is designed to explore how the metrics change over time based on broad developments like the credit freeze that followed the housing market and bank crashes, or Hurricane Katrina’s impact on the Gulf.

Resiliency is a quality necessary for healthy communities during good times, too, and consumer credit is a key part of building up a vibrant community as well as your own quality of life. That’s one reason why careful use of personal credit, as the project scientists have discovered, has an impact on everyone else.

“Prudent credit behavior is good for the community as well as the individual,” they explain in a poster graphic that looks at U.S. local credit economies. It includes data on how many adult residents have a credit history, whether or not they pay obligations on time, how many “max out” that credit at the traditional 30 percent benchmark, and how much of that money is borrowed at subprime lending rates.

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For example, Ohio residents track with the overall U.S. percentages when it comes to credit stress, with 81 percent of the residents in good credit standing, 6 percent improved, and the rest weak, struggling or in declining credit health.  But differences at the county level start to appear between the Cleveland metro area – Cuyahoga, Lorain and Lake counties – as  compared with southwestern Brown County, east of Cincinnati along the Ohio River, or Logan County, with its R&D and tech sectors, and agriculture as its No. 2 industry in central Ohio, west of Columbus.

What the Community Credit team encourages people to do is understand that these are meaningful differences in the life of a community. The messages about inequities in credit access, or of responsible personal use, are “we’re all in this together” messages the Community Credit project hopes people hear.

To that end, they want civic leaders and community advocates to use the information to better serve community members – creating credit education programs, for example – and to better prepare for ongoing economic development that includes the day-to-day as well as credit access during crises.

 

 

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