Give credit where it’s due

The inequality is clear: While only 1 in 19 white Americans has a credit score of 620 or lower – a level considered high-risk by most lenders – 1 in 5 black Americans do.

The reasons for these disparities are complex, but they stem from discriminatory policies dating back to before the founding of the nation that denied black Americans access to wealth-generating assets.

“Credit scores are the perfect example of how structural racism works,” says Chi Chi Wu, an attorney at the National Consumer Law Center and author of “Reparations, Race, and Reputation in Credit: Rethinking the Relationship Between Credit Scores and Reports with black communities.

“You start with black consumers who were denied their human rights and economic rights during slavery and redlining and Jim Crow with legalized discrimination,” says Wu. “Then you deprive their communities of assets. This affects the economic position of these communities, and this is reflected in credit ratings.

With credit scoring, a system developed in the 1970s and implemented in the 1980s ostensibly as a neutral way to assess creditworthiness, its impact on the racial wealth gap is crystal clear. Black Americans are more likely to have a negative payment history against them in credit scoring and much less likely to experience positive benefits from the type of payments they are most likely to make, such as rent and public services. And the credit bureaus don’t have to give a reason.

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These factors drive some Black Americans out of traditional credit markets, steering them into less stable forms of credit, such as check cashing, payday loans, rent-to-own systems, and secured credit cards. . These often come with usurious interest rates and exorbitant fees that make borrowers more likely to default, further damaging their credit.

The system discourages some black Americans from trying to access credit markets for fear of being rejected or subjected to predatory conditions. Black Americans are much more likely to be credit blind, with little or no credit history. While only 9% of white Americans fall into this category, 15% of black Americans do.

Credit-Invisible Americans primarily use cash, viewing it as safer than banking, and even promoting the idea among black consumers that paying cash is a virtue.

In addition to the 15% of black Americans who are invisible to credit, an additional 13% have a credit history that does not show up in credit scores, compared to 7% of white Americans, according to data from the Consumer Financial Protection Bureau.

Rep. Ayanna Pressey’s (D-MA) recent push to reform credit reporting practices comes not just from policy documents and data that show the stranglehold these practices place on Americans, especially people of color. On this question, she brings her lived experiences to bear.

“In full transparency, I’m a black woman, growing up in America, who was raised in a red light district,” Pressley said during a congressional hearing last July. “While I was working as a full-time unpaid intern in Congress, working three part-time jobs, collecting various money orders to pay rent, to pay utilities, I cashed my check at a check cashing establishment . And I did it because that’s what I grew up close to.

She says her family “took great pride” in buying things with cash because it was considered the honorable thing to do.

She notes that her majority-minority congressional district in Greater Boston “has 57% of the city’s check-cashing locations, but only 12% of the city’s commercial bank branches.”

“So for my constituents and the roughly 1 in 5 people across America who are unbanked or underbanked, lack of access and broken trust with financial institutions is incredibly costly,” says Pressley. “The cost of cashing checks alone can be as high as $2,400 per household with an annual income of $32,000. Only. Collection. Checks.

Pressley described the very factors that drive the dual credit market to send more black and brown Americans to high-risk, high-cost financial institutions rather than traditional banks: fear of taking on debt, distrust of towards financial institutions and even the idea that cash is king.

“The experience you hear Rep. Pressley talk about is the experience of so many black Americans,” says Lisa Rice, president and CEO of the National Fair Housing Alliance. “They live in a credit desert.”

The American dream will never be accessible to all as long as inequalities are integrated into the credit market. It’s time to revamp it. Here’s how.

Revamp credit scoring to better assess risk. Today, the credit score problem is largely two-fold: First, credit scores are often inaccurate or affected by inherent racial bias. And in most cases, they’re also a terrible predictor of consumers’ ability to pay.

President Joe Biden has proposed the creation of a public credit reporting agency to compete with private entities Equifax, TransUnion and Experian, which have collectively faced a torrent of criticism for everything from data breaches to inaccuracies and racial prejudice.

Biden’s plan is admirable, but the problem isn’t just who scores, it’s how they do it. A public credit reporting system can only provide benefit if it fairly and transparently assesses the factors that actually predict a consumer’s ability to pay, gives consumers a greater ability to challenge and correct inaccurate information and refrains from unequally weighting negative and positive payment activity.

Payment history is one of the major factors affecting credit rating. This in itself creates racially disparate results. For example, timely mortgage payments improve consumer credit scores, but rent payments generally do not. But while the homeownership rate for white Americans is 72%, for black Americans it is only 43%.

“We need to make sure the infrastructure is in place for people to report their housing rental payments to credit repositories so the data can be used,” Rice said.

Weighing rent payments equally on mortgage payments will also help eliminate the low-income credit gap created when low-income Americans are forced to make tough decisions about which bills to pay to try to make ends meet.

“People pay their rent first,” says Wu. credit.”

Other alternative payment data that may serve as more predictors for ability to pay, the researchers say, are utility payments, telecommunications account payments such as cell phone plans, and payment histories from mobile phones. Bank accounts.

Stop using credit scores for non-credit decision making and stop weighing unwilling debt. There is no data – none – showing that a person’s credit rating is predictive of that person’s value as an employee. Yet credit scores are often used for job applications, making it more difficult for people with mild or negative backgrounds to advance in their careers. This inability to earn better wages and pay bills better creates a cycle that causes people to fail.

“Credit scores aren’t as predictive as people think,” Wu says.

In addition to prohibiting the use of credit scores in employment decisions (with narrow exceptions for things like federal security clearances), the use of credit scores should also be prohibited to access coverage. insurance or to open accounts for heating, electricity and other necessary utilities. to keep homes safe and livable.

Additionally, credit reporting agencies should not be allowed to consider involuntary debts, such as debts incurred as a result of medical bills, divorces, or judgments in legal disputes over matters that do not involve the type of payments that would have been reported to the credit reporting agencies in the first place. . Records of collections, missed payments and personal bankruptcy filings remain in the credit system for seven to ten years – a period that is expected to be reduced. The system can’t work if people don’t have the ability to get up if they’ve fallen.

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The announcement by the three largest credit bureaus, Experian, Equifax and TransUnion, to voluntarily eliminate 70% of consumer medical debt from credit reports is commendable. However, black Americans are more likely to have medical debt, according to the Consumer Financial Protection Bureau, credit bureaus have poor self-monitoring records, and no one should be less able to buy a home, start a business or to obtain a job because of a previous illness or injury. The only fair solution is a federal mandate prohibiting the consideration of medical debt in any credit rating.

Other measures included in Pressley’s CREDIT (Comprehensive Credit Rating Enhancement, Disclosure, Innovation, and Transparency) bill, which passed the House but has yet to pass the Senate, include banning lenders to charge higher interest rates or otherwise make loans less affordable and riskier for borrowers solely because of lower credit scores. This approach, Wu points out, is what caused the 2008 foreclosures crisis to hit black communities the hardest.

Provide repair loans through special purpose credit programs and other measures. Those who have been unable to access credit markets due to racially disparate biases in credit reporting need an on-ramp to level the playing field.

One way is through special purpose credit programs authorized under the Equal Credit Opportunity Act, which provide low or no interest loans to homebuyers and homeowners. small businesses to fight systemic racism in credit underwriting.

“I call these loans ‘reparation loans’ because that’s really what they are,” says Wu. “They are a form of reparation for centuries of legalized, deliberate and intentional discrimination. And addressing these inequalities will require intentional action. »

Kimberly Atkins Stohr is the senior columnist for The Emancipator, as well as an opinion writer and senior columnist at the Boston Globe. It can be attached to [email protected]. Follow her on Twitter @KimberlyEAtkins.

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