The Colorado economy runs on credit. We use credit to put roofs over our heads, get ourselves to/from work, balance out the time between paychecks, pay for our education, manage unexpected expenses, pay for our health care, and even pay for child care. For many Coloradans, especially the 21.5 percent of Coloradans who are unbanked or underbanked, that credit is far less available and far more expensive than it is for others, making it much harder and much more expensive to go about their daily lives.

Alternative Financial Services

On average, families who are unbanked or underbanked often pay 1 percent or more of their income for check cashing fees. They then pay uploading fees to prepaid debit cards or money order fees to pay bills. They lack access to transaction or account protections against errors and fraud and their routine bill paying don’t contribute to building strong credit histories. They pay hundreds of dollars a year for their financial transactions. Yet the primary reasons people chose not to use banks are the minimum balance requirements and high fees. 

As banking mergers and acquisitions have made community banks scarce over the past 40 years, and large national banks began charging high overdraft and monthly maintenance fees, traditional banking became less and less affordable for those with low to moderate incomes. Payday lenders and check cashiers stepped in to fill the vacuum. Data show payday borrowers are aware of the costs of the loans they take out and do extensive searches before deciding to take out payday loans. “If anything, the pervasive use of payday lending does not show irresponsibility or ignorance. It just shows many people need small loans,” says Mehrsa Baradaran.^[1]

The Impacts

Access to affordable credit is a major driver of wealth building, as people borrow significant sums to buy homes and start businesses. Inversely, credit that traps a family in debt erodes their financial wellbeing, preventing them from saving for unexpected expenses and building financial stability, let alone wealth. Being locked out of safe and affordable credit markets has had devastating, generational impacts on entire communities. Given numerous barriers to credit were constructed along racial lines and we continue to face racial income inequality, these alternative (and often predatory) financial products have had a disparate impact on Coloradans of color. 

Access to safe and affordable financial services alone will not remedy rising inequality and wages that don’t keep pace with rising costs of living. However, safe and affordable products and services could have a significant impact on low- and middle-income Coloradans’ abilities to manage unexpected costs and financial emergencies. 

Many systems and policies created the two-tiered financial system we have today. Dismantling it and expanding access to safe and affordable credit will need to be led by the people who are the primary customers of these lenders, in partnership with banks and credit unions, local and state government, and other community institutions.

^[1] Baradara, Mehrsa. “How the Other Half Borrows.” How the Other Half Banks, Harvard University Press, 2015, pp 115-117.