AMERICAN MINORITIES & BAD CREDIT
AMERICAN MINORITIES & BAD CREDIT
A bad credit score (669 or Lower) or lack of a documented credit report can create a vicious cycle, depriving consumers opportunities for housing, lending, and also procuring assets which lead to long term financial stability. There is a strong correlation between poor credit, and gender/race. Discriminatory policies such as predatory lending and redlining have effects which persist in a number of way. Sub-prime lending is at the forefront and causes its victims to pay as high as 20X the value of the actual loan.
African Americans experience a much higher rate of subprime credit scores (670 or lower) than white Americans, and are more likely to discover errors on their credit reports which impact their borrowing capabilities negatively (Ruetschlin, 2016).
African Americans have a lower chance of accessing credit than white Americans. In America, nearly 20% of consumers have no credit history, and about 51% of credit users were found to have subprime credit scores.
RACIAL DISPARITIES IN CREDIT
- In a recent $1.3 million dollar study carried out by Freddie Mac, several surprising differences in credit score’s between Caucasians and African Americans were revealed. The study carried out a comparison of credit scores of members of different ethnicities. Results showed that Caucasians who earn less than $25,000 annually were likely to have higher credit scores than African Americans who earn from $65,000 to $75,000 per annum. Overall, the study found these results based on ethnicity to have poor credit
- 23% Caucasians have poor credit
- 28% Hispanics have poor credit
- 48% African Americans have poor credit
The study involved 80,000 individuals. The researchers categorized a “bad” rating as anyone who has
- 2 or more bills past due by more than 1 month in the past 2 years
- A single bill past due by 3 months
- A lien against them
- A judgment against them
While the study showed the relationship which exists between ethnicity and bad credit, no conclusion has been reached as to the actual cause (Tumulski, 2016). Credit reporting is meant to be free of prejudice, however some researchers believe the system may be stacked against minorities.
In a survey of African Americans with credit scores less than 700, 51% said they always turn out living through paychecks, and are more likely than the general population of consumers with credit scores below 700 to use payday loans and paycheck advances rather than have bank loans and credit card balances (Holmes, 2019).
Credit scores can perpetuate racial disparities in a number of ways including
- Financial Security
- Residential Cities
- Business Plans
- Neighborhood Choice
Credit score data from Bhaskaran reveal how racial disparities persist in cities across the economic spectrum, 38 of the 60 cities have differences in median credit scores of 100 points or more between mainly white and non-white areas. Nationwide, the differences in median credit scores is nearly 80 points (697 versus 621, non-whites), which can cost families an extra $100 or more monthly and thousands of dollars over the lifespan of the loan.
Research also shows:
- Predominantly minority areas in more than 50 of the 60 cities have poor/fair credit scores (669 or lower), and 99% are considered sub-prime
- Conversely, predominantly white areas in only 4 of the 60 cities have below-sub-prime (669 or lower) credit scores.
Hispanic and Black individuals also have a higher chance than white individuals to be un-scored or credit invisible.
Perhaps even more troubling, reports have shown that subprime loan products that can further damage credit history are foist upon women and communities of color, even when such borrowers have strong credit and could otherwise qualify for prime loans (Bhaskran, 2016).
- In 2018, 32% of African Americans and 28% of Latinos did not have access to a credit card, compared with 15% of whites.
- African Americans and Latinos are less confident that they will be approved for credit than whites. In 2018, 84% of whites said they were confident that they would be approved for a credit card, compared to 72% of Latinos 63% of African Americans.
- While 12% of whites were not confident that they would be approved for credit, 27% of African Americans and 20% of Latinos were not confident.
Employers, landlords and insurance now use credit scores and reports to make decisions that have major bearing on economic and social opportunities. This is in response to aggressive marketing by the “big three” multinational credit bureaus – Equifax, Experian and Transunion. These days, your credit history can decide whether you get a job or apartment, or access to decent, affordable insurance loans. Credit reports and scores are not race neutral. Rather, they embed existing racial inequities in our credit system and economy – to the point that a person’s credit information serves as a proxy for race (Ludwig, 2015).
WHY DO CREDIT SCORES MATTER?
Credit scores are not just a measure of an individual’s financial health. They can make achieving financially stability easier and assist in gaining traction in an ever changing economy. Credit scores can evaluate an individual’s financial security from several angles. Credit scores can affect:
- The ability to pursue opportunity through a home or business loan
- The ability to withstand a financial shock, like getting a credit card to pay for an unexpected repair
- The price of credit, which affects the amount a borrower ends up repaying
- The cost of insurance
- Success securing an apartment
Credit score disparity between predominantly white and minority areas might be a contributing factor to worsening health inequality. In 1963, the average wealth of white families was $121,000 higher than the average wealth of nonwhite families. By 2016, the average wealth of white families was more than $700,000 higher than that of black and Hispanic families (Ratcliffe, 2017). A small change in credit scores can lead to thousands of dollars in loan interest payments. Credit scores determine whether companies can get a loan, and if so, how much they will pay in interest.
According to FICO’s loan calculator, even minor changes in credit score can result in large differences in interest paid over the life of the mortgage or loan.
Blog by Andre Slaughter
- Kenneth P. Brevoort, Philipp Grimm and Michelle Kamabar, “Data Point: Credit Invisibles”, Consumer Financial Protection Bureau, Accessed 27 January, 2020. https://files.consumerfinance.gov/
- Catherine Ruetschlin, “The Challenge of Credit Card Debt for the African American Middle Class”, NAACP, December 2013.
- Suparna Bhaskaran, “Pinklining: How Wall Street’s Predatory Products Pillage Women’s Health, Opportunities, and Futures”. AACE Institute, 2016.
- Caroline Ratcliffe and Steven Brown, “Credit Scores Perpetuate Racial Disparities, Even in America’s Most Prosperous Cities”. Urban Institute. 20 November, 2017.
- Sarah Ludwig, “Credit Scores in America Pepetuate Racial Injustice”. The Guardian. 13 October, 2015. Https://amp.theguardian.com/
- Steve Tumulski, “African Americans More Likely to Have Bad Credit”. 18 October, 2016. https://www.badcredit.org/
- Tamara E. Holmes, “Credit Card Race, Age, Gender Statistics”. December 17, 2019. https://www.creditcards.com/