What Your ZIP Code Says About Your Credit Score

Nicolas Cesare
What Your ZIP Code Says About Your Credit Score

You may be surprised as the things that can affect your credit score — everything from your income to the size of your family. Can your ZIP code affect your credit score as well?

Knowing what affects your credit score is a critical part of improving your credit, which will help you to qualify for better loan terms, determine mortgage interest rates, and help you negotiate credit card deals. For these reasons, it’s essential to know what your ZIP code says about your credit score.

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Does Where You Live Affect Your Credit?

Credit scores vary according to a number of factors and location is one of them.

How Credit Score and Location Are Correlated

People of similar values, backgrounds, and economic situations tend to group together. From these groupings and data collected by the FBI, we can gather information about how credit score and ZIP code are correlated. Here are some interesting ways in which location and credit are related:

  • Areas with a high minority population tend to show lower average credit scores. This is especially true of areas with a high African-American or Hispanic population. This trend has led some to wonder if credit scores are racist.
  • There isn’t much difference between urban and rural areas when it comes to credit scores, so living out in the country does not impact your ability to build credit.
  • Married people of either sex have better credit scores than their single counterparts, so neighborhoods that cater to families are likely to see a higher average credit score across their residents.
  • Income is strongly correlated with credit score — as one goes up, usually so does the other, though sometimes rich people do have poor credit. This means that generally poorer neighborhoods tend to have a lower credit score on average.
  • Age is also correlated with credit score. The older an area’s general population is, the higher the average credit score is likely to be.

Do ZIP Codes Matter?

There are undeniable correlations between location and average credit score, but does this mean that your ZIP code matters on your credit report?

Are Credit Bureaus Allowed to Use ZIP Codes to Assign Credit Scores?

As the Consumer Finance Protection Bureau notes, it is against federal law for lenders to discriminate against borrowers on the basis of:

  • Race
  • Religion
  • National origin
  • Gender
  • Marital status
  • Age

Although the law does not specifically pick out discrimination by location as unlawful, many of the differences in credit score from one ZIP code to another exist because of differences in racial demographics, marital status, and age.

Are Credit Scores Correlated With or Caused By Location?

Credit score and location are correlated, but that doesn’t mean that your location determines your credit score. Instead, other factors related to location have a much bigger impact on average credit scores by ZIP code.

Having a high income often means that you have more power to pay off any debt that you take on. In addition, the higher your income is, the more likely it is that the debt you take on is voluntary — poor neighborhoods see a much higher concentration of predatory lenders like payday loans and car title loans. These predatory loans are designed to take advantage of someone’s financial need and their low income, saddling them with high interest rates and additional fees. Predatory lending practices concentrated in a certain area will also drive the credit score of that location down, as residents take on more and more debt that they cannot repay.

Income is also correlated with ethnicity, helping to explain to presence of predatory lenders in African-American and Hispanic neighborhoods. This also goes a long way towards explaining why areas with a high minority population tend to have lower credit scores.

When it comes to age and marital status, it should come as no surprise that people who have spent more time working on their credit and have a longer history with debt also have higher credit scores. Remember that a credit score is supposed to measure a person’s ability to handle debt responsibly, so credit reporting companies are more likely to assign high scores to people who have more experience with good debt management.

What Else Does Your ZIP Code Say About You?

When ZIP code and credit score are correlated, that means that locations with communities and housing demographics are also likely to have different financial experiences.

Neighborhoods with low credit scores probably won’t receive as many good credit card offers. This is because credit card companies like to offer their best deals to people with high credit scores. Doing so helps the credit card company make money by squeezing fees and higher interest rates out of their poorer cardholders.

People in different neighborhoods are also likely to have higher or lower average interest rates depending on the average credit score of an area. This is because one of the things that makes interest rates change is a borrower’s credit score.

ZIP code and credit score are related in interesting ways, but you should never use where you live to infer your own individual credit score. Instead, focus on developing good financial habits to improve your own credit score.

How credit scores are calculated can be confusing. Visit our credit score resource center for more articles and information.

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