Are Credit Scores Racist? How Credit Reporting May Perpetuate Discrimination
Whether we realize it or not, we all depend on our credit score quite a lot. A high credit score makes it easier to get loans for important life events like buying your first home, getting a new car, or even starting your own small business. However, data from the FBI has shown that minorities tend to have much lower credit scores than their majority counterparts, making it harder for nonwhite Americans to gain access to the financial institutions and resources that are necessary to get ahead in modern life. For this reason, some might argue that credit scores are racist.
Are credit scores racist? Can a credit bureau discriminate based on race when it comes to assigned credit scores? Let’s find out.
How Credit Reports Reflect Racial Disparities
It’s against the law for credit bureaus to take someone’s race into account when preparing their credit report. Likewise, the Equal Credit Opportunity Act prevents lenders from denying a loan or charging unfair interest rates based on a borrower’s race.
However, this does not mean that credit scores don’t reflect deep economic divisions among people of different races and backgrounds. A 2013 poll found that 62 percent of indebted white households has “excellent” or “good” credit scores. Compare this with 44 percent of African-American households that also carried debt.
While the law prevents credit bureaus from using race to determine credit score, there are some factors that are correlated with race and that indirectly affect a person’s credit score. Among these are:
- Income — How much money you make goes a long way towards determining your credit score. Having higher income gives you more power to pay off any loans that you take out and to pay off your credit card balance each month. Historically, minorities have been (and continue to be) underpaid in the United States, leading to sharp differences in income between white and nonwhite Americans.
- Family Credit History — Although parents can’t directly influence their children’s credit scores with their own credit history, having a strong credit history that runs in the family can improve a person’s credit score. Parents who have good credit of their own are more likely to teach good credit habits to their children. Parents who had their children as authorized users can also give their kids real-world experience with credit before they leave the nest. Decades of financial discrimination against minorities have made it hard for these families to build up good credit habits over the generations.
- Location — Location is correlated with credit score, so poor neighborhoods often have much lower credit scores than their wealthy counterparts. Since minority populations are often grouped together in low income neighborhoods, these areas have lower credit scores on average.
Although race cannot be factored directly into a person’s credit score, the credit differences that exist across racial lines reflect deep economic divisions between people of different races and their histories working and living in America.
How Credit Scoring Reinforces Racial Inequality
Not only do credit scores reflect racial inequalities when it comes to financial power, but they also reinforce those very same divisions. Here’s how credit scores perpetuate these racial divisions.
- A low credit score makes it harder to take out personal loans. Personal loans play a big part on today’s economy, where big purchases like a new home or car are impossible for almost anyone to make with the cash in their bank account.
- When it comes to private student loans, having parents with a good credit score can be crucial. Since many students haven’t yet developed their credit history, private lenders will want the reassurance from having a parent cosign. However, if your parents don’t have a good credit score, you won’t be able to get as good a deal on private student loans.
- Starting a small business usually requires loans, since no one person has the money to cover the costs of opening and operating a business. However, before your business credit score is established, lenders will want to look at your personal credit score. This can make it harder for minorities to start their own businesses, even if that business would help them get ahead economically.
- Predatory lenders tend congregate in neighborhoods with a high minority population. These lenders will take advantage of an area’s need for emergency cash by offering things like payday loans and car title loans. In reality, these loans will come with unreasonably high interest rates and fees, making it impossible for borrowers to pay them off. Becoming the victim of predatory lenders will just cause a person’s credit score to go down even further.
Credit bureaus are prohibited from discriminating based on race, but that doesn’t mean that credit scores aren’t racist. Today, credit scores reflect racial differences in economic status. Even more, though, they contribute to deepening those divisions by making it harder for minorities to access the financial resources necessary to improve their economic standing and attracting predatory lenders who just make the situation worse.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated February 28, 2019. It was originally published November 12, 2017.