Low Credit Scores Affect Minorities Disproportionately

“Tell me something I didn’t know,” many of you are probably saying.

While many of us knew that inaccuracies were common in credit reports, there was nothing but anecdotal evidence race being a predictive or determining factor in credit scoring. Now there is confirmation and proof. That’s the good news.

According to a study conducted by the University of Denver Center for African American Policy, credit scores are used to deny people of color credit access, and more insidiously, they are increasingly being used as tools to deny more basic necessities, like employment and insurance. Most troublesome is the fact that there is no endorsed method by which consumers can move from a sub-prime credit score to a prime credit score.

In part, these were some of the other findings:

• Credit scores are more closely correlated to lack of access to financial services for unbanked and underbanked communities than other factors, such as race, income and ethnicity.
• Credit scores today are used for an increasing array of basic necessities, such as determining eligibility to obtain employment, rent a home, obtain insurance and open accounts for checking accounts, as well as basic utilities like telephone service or electricity.
• The more than 130 million Americans lacking prime credit scores (also the unbanked and underbanked) are disproportionately African-American and Hispanic.
• Although banks may be located in areas with high concentrations of low Fair Issac & Co. (FICO) scores, they do not provide proportional access to their services in these underserved areas, compared with higher-FICO-score, higher-income communities.

Now for the (really) bad news: The Federal Reserve Bank has determined that there is no systemic bias against minorities in credit scoring. Seems a bit dubious to me but, OK.

The Fed, who themselves commissioned a study of the situation at the behest of Congress in 2003, found in their analysis that the game wasn’t “rigged,” however.

Sadly, some of the things that would provide proof of one’s financial responsibility are completely ignored by the three credit bureaus. Consumers’ on-time payment histories for things like rent, utilities, and certain “non-traditional” loans are not reported to credit bureaus typically. As such according to the experts, the lack of reporting for such everyday proofs of financial stability hamper the accumulation of assets and wealth. Makes sense, because with subprime credit scores —- those below 600 traditionally —- it becomes incredibly difficult to find mortgages for homes, or small business loans.

Contrast this recent Fed finding with findings back in the ’90s by the EEOC, which did a study that confirmed credit bias against individuals with certain jobs, which were a minus for one’s credit record, quoting from a recent discussion citing that report report for example, “a credit-scoring system may place a low score on occupations such as migratory work or low paying service jobs… .”

The report does however, confirm that with prudence and foresight, one can achieve scores considered good to superior (about 650-800), even for those whose scores are not very good at this point.

So what have we learned? First, guard your good credit by checking your scores with regularity, and continuing to be prudent. Second, fix your bad credit by taking care of as many of your delinquent accounts as you can, and open new accounts selectively. Third, dispute inaccuracies. And last, realize that the system is jacked up - really. If you’ve gotten screwed up in the game, understand it may take months to years to fix the damage, but it can be done.

(As an aside, I have to add that my level of frustration with the whole credit scoring system increases by the day, first because of the apparent, if not systemic bias present. And then to add further insult to injury, we use three different credit bureaus and in many cases the data they collect is STILL wrong! Go figure.)