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Credit Scores and Inequality
One number to rule them all
The most important number in your life is your credit score. More important than your GPA, your bank balance, your standardized test scores — your credit score determines which opportunities are open or closed.
Your credit score not only sets the interest rate you get on loans or mortgages, landlords also use it to decide if they want to rent to you or not; utility companies use it to determine if you need to pay a deposit up-front; phone companies use it to see if you qualify for a new contract (and may charge higher costs); and 16% of employers say they run a credit check on prospective hires.
Accordingly, low credit scores can drive greater inequality by restricting certain people from finances and resources they need to survive. Moreover, it can be exceptionally difficult to raise your credit score once it is considered subprime.
Credit scores can be difficult to understand, so here’s all you need to know. FICO credit scores run from 300–850 and they’re based on 3 main factors — “how late you’ve ever been on payments, how much was owed, and how recently and how often you missed a payment.” The best way to improve your credit score is by consistently making payments and keeping low debt balances. Getting a good credit score obviously can be hard if no one is willing to extend you credit in the first place. How am I supposed to build credit if I can’t get credit? A score of 580–619 is considered Subprime and anything above 720 is Super-Prime.
Alfred Carpenter knows first-hand how inequality and bad credit can go hand-in-hand. After he lost his job in 2008 selling Ferragamo shoes on 5th avenue, he struggled to find a job for years. Employers loved his resume and he interviewed well, but credit checks stopped him from actually getting hired. Alfred said that when he interviewed at Bergdorf Goodman, the company told him that they ran a credit-check that stopped them from extending him an offer. Alfred had filed for bankruptcy in 2008 after racking up $50,000 in medical bills when he was jobless and uninsured. “No one lets me explain, ‘Hey, I had this freak injury when I didn’t have health insurance,’ ” he said. “It’s black and white: You have these bad marks on your record, you don’t get hired.”
Black people and women are consistently given lower credit scores
Credit scores are supposed to be unbiased, but the data reveals huge racial divides. The 1974 Equal Credit Opportunity Act outlawed the use of sex, marital status, national origin, religion or race to determine credit scores, yet these factors still seem to have outsize influence.
The chart above also shows a 53% correlation between how White a county is and how high the county’s median credit score is. This correlation can be even strong when we look at the South vs. the Midwest, for example.
Additionally, predominantly Black neighborhoods have a median credit score that is 100 points lower than white neighborhoods, both across the US and even within the same city. That’s the difference between being considered subprime vs. prime.
51% of White people have credit scores above 700 while only 21% of Black people are put into this high category. Even worse, 45 million Americans have no credit score at all, with Black and Hispanic households overrepresented here. 15% of Black Americans are “credit invisible” compared to 9% for White Americans.
Sumpter, County Florida has the nation’s highest median credit score at 789. Sumpter County’s population of 130,000 is 90% white.
Women across the US also have lower credit scores by about 10–15 points. This persists largely because of the gender pay gap (i.e. women use a larger portion of their credit since they get paid less) and traditional household rolls about who manages money and the credit card. This gap persists despite the fact that men probably should have lower credit scores, since they tend to carry 19% more debt than women do.
Tunica County, Mississippi has the lowest median credit and has the most people living with subprime credit. Tunica is commonly known as “The Gateway to the Blues” in part because it sits just below Memphis and because the region has some of the highest poverty rates in America. The median credit score in Tunica is 563. Overall, 60% of the region’s 10,000 residents have subprime credit. Gambling was the biggest industry in Tunica (the 3rd largest in America by revenue behind Las Vegas and Atlantic City), but the major casinos left in 2014.
Flint, Michigan follows closely behind with a median credit score of 586. Utility payments are often used to help people build credit, but in Flint, residents have refused to pay for toxic water, impacting their credit scores. Damned if you do, damned if you don’t.
Struggling Students May See Credit Scores Slip
Student debt can also be crippling for rebuilding credit scores, particularly for young people who are unable to repay. I looked at data from October 2020 during the COVID-19 pandemic as student debt repayments became more difficult for many, and found that there is a 67% correlation between credit scores and student debt delinquency. Students who took on debt to go to college and graduated into the pandemic were then hit with crumbling credit scores. Promises not kept. This problem is particularly acute for students who defer wages while they are in school with the hope of higher earnings in the future.
“I thought I had done the right thing by furthering my education,” Janet Alvarez said. “But I found myself graduating into the Great Recession.” She was unable to pay back her student loan debt, and ended up with a 490 credit score. She was making $30,000 a year after graduating from college and felt hopeless that she would ever get her credit score back. She spent countless hours trying to reduce her interest rates to pay off debt and worked multiple jobs to make it easier reliably pay back her lenders. Janet’s story is not unique. Crisis-after-crisis we see students struggle with tumbling credit scores that can take decades to rebuild.
The Path Forward
Ban credit checks for employment — Research from economist at the Federal Reserve and Harvard Kennedy School shows that banning credit checks in the hiring process can increase employment for low-income Americans by 1.9–3.3%. These gains also tend to be in higher paying jobs. In 2019, the House Financial Services committee passed a bill that would do just this, but it died on the floor as Republicans argued the bill was too broad and that more data points were important in hiring. What you can do - if you’re involved in hiring, make sure that your employer doesn’t use credit checks since it may preclude minority or low-income candidates from getting hired.
Penalize credit agencies for incorrect information — There is currently no fine that credit agencies experience for incorrect information, yet 1 in 3 Americans have an error on their credit report. If you find an error on your credit report, your only recourse is to call up the credit reporting agency and ask them to fix it. And even then the credit agency’s only legal requirement is to check-in with the provider of the faulty data. 1 in 5 Americans have a “potentially material error” in their credit reports and 8 million times per year consumers contact the agencies about these complaints. The National Consumer Law Center has referred to this complaint process as “the Kafka-esque automated dispute system used by the credit bureaus.” Yet without money on the line or skin in the game, errors will persist, people will have erroneously incorrect credit scores, and consumers will be responsible for realizing and fixing the issues thrust upon them.
Case-in-point: When one of my close friends applied for his first credit card in college, he was denied because the company said he had subprime credit. He didn’t know how this was possible, so he went digging and found that his social security number was tied up in trailer park debt in Louisiana. He lives in Massachusetts and had never been to Louisiana. He explained “My parents signed up to be a last resort guarantor on a credit card that had a $200 monthly limit that I would use once per month and immediately pay off to build my credit back.” Years later and dollar-by-dollar, he was able to dig his way out of the subprime credit score hole, for a FICO mistake and no fault of his own.
Check your credit score today — On AnnualCreditReport.com you can get a free credit report. Under The Fair and Accurate Credit Transactions Act (FACTA, 2013) every person in the US is authorized to get one free credit report every year without any penalty for checking. Equifax, Experian, and TransUnion are the 3 credit agencies that determine your credit score and are required by FACTA to issue your credit report. If you know your score, if you can see your report, if you can correct any errors, then you maybe stand a chance to raise your score.
Despite these steps to reduce how credit scores impact inequality, it is important to note how complex the credit scoring system has become. Josh Lauer, the author of Creditworthy: A History of Consumer Surveillance and Financial Identity in America, explains how we don’t really have one credit score, but multiple scores controlled by multiple companies that often make their revenue from lenders, not consumers.
Maxine Waters, the chair of the House Committee on Financial Services, gave a speech on the floor of Congress a few months ago that summarized the challenge perfectly:
“Good credit is a gateway to wealth. Yet, for far too long, our credit reporting system has kept people of color and low-income persons from access to capital to start a small business; access to mortgage loans to become homeowners; and access to credit to meet financial emergencies….This issue is not a matter of personal failings. This is about a failed system.”