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Dissecting policies and practices, offering solutions informed by scholarship and lived experience.

THE BIG PICTURE

Giving credit where it’s due

‘Credit scores are the perfect example of how structural racism works’ —Chi Chi Wu, National Consumer Law Center

With credit scoring, a system developed in the 1970s and implemented in the 1980s ostensibly as a neutral way of weighing credit worthiness, its impact on the racial wealth gap is crystal clear.H. Hopp-Bruce/The Emancipator/Nadia Snopek/Adobe

Think about the idea of risk. Certainly, the pursuit of the American Dream requires assessing all kinds of risks: taking on student loan debt for the promise of a career that brings financial stability, deciding to start a new business, or choosing investment opportunities that will pay off the most.

It also requires being on the other side of that risk assessment. Will lenders be willing to provide financing for your home or business? For Black Americans, the likelihood is far greater the answer will be “No.”

That’s due to credit scoring, one of the single largest factors affecting every American’s financial health.

The inequality is clear: While only 1 in 19 White Americans has a credit score of 620 or lower — a level considered high risk for most lenders — 1 in 5 Black Americans does.

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

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

“You start with Black consumers who have been denied their human rights and economic rights during enslavement and redlining and Jim Crow with legalized discrimination,” Wu says. “Then you deprive their communities of assets. That affects the economic position of those communities, and that is reflected in credit scores.”

With credit scoring, a system developed in the 1970s and implemented in the 1980s ostensibly as a neutral way of weighing credit worthiness, its impact on the racial wealth gap is crystal clear. Black Americans are more likely to have negative payment histories weighed against them in credit scoring and far less likely to get the positive benefits from the kind of payments they are most likely to be making, such as rent and utilities. And credit reporting agencies don’t have to give a reason why.

H. Hopp-Bruce/The Emancipator/Nadia Snopek/Adobe

Those factors chase some Black Americans out of traditional credit markets, steering them toward less stable forms of credit, such as check-cashing, payday loans, rent-to-own schemes, 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 at all, for fear that they will be rejected or be subject to predatory terms. Black Americans are far more likely to be credit invisible, with little or no credit histories. While only 9% of white Americans fall in that category, 15% of Black Americans do.

Credit-invisible Americans primarily use cash, seeing that as safer than banking, and even promoting the idea among Black consumers that paying in cash is a virtue.

On top of the 15% of Black Americans who are credit invisible, an additional 13% have credit records that don’t show up in credit scores, compared to 7% of White Americans, according to data from the Consumer Financial Protection Bureau.

Rep. Ayanna Pressley’s (D-MA) recent push to reform credit reporting practices doesn’t come from just the policy papers and data that show the stranglehold these practices put on Americans, particularly people of color. On this issue, she brings her lived experiences to bear.

“In full disclosure, I’m a Black woman, growing up in America, who was raised in a redlined neighborhood,” Pressley said during a congressional hearing last July. “As I was working as a full-time unpaid congressional intern, working three part-time jobs, piecing together various money orders to pay rent, to pay utilities, I cashed my check at a check-cashing facility. And I did that because that is what I grew up in proximity to.”

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

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

“So, for my constituents and the estimated 1 in 5 people across America who are unbanked or underbanked, lack of access and fractured trust with financial institutions is incredibly expensive,” Pressley says. “The cost of cashing checks alone can come to $2,400 per household with an annual income of $32,000. Just. Cashing. Checks.”

Pressley has outlined the very factors that drive the dual-credit market sending more Black and Brown Americans to high-risk, high-cost financial institutions rather than traditional banks: fear of going into debt, distrust of financial institutions, and even the idea that cash is king.

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

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

Revamp credit scoring to better assess risk. The problem with credit scoring today is largely twofold: First, credit scores are often inaccurate or affected by inherent racial bias. And in most circumstances, they are 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 bias.

Biden’s plan is admirable, but the problem isn’t just who is doing the scoring, it’s how they’re doing it. A public credit scoring system can only provide a benefit if it fairly and transparently weighs factors that actually predict a consumer’s ability to pay, gives consumers a greater ability to dispute and correct inaccurate information, and refrains from unevenly weighing negative and positive payment activities.

One of the top factors affecting credit scoring is payment history. That in itself creates racially disparate results. For example, timely mortgage payments boost consumers’ credit scores, but rent payments generally do not. But while the homeownership rate for White Americans is 72%, for Black Americans, it’s only 43%.

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

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

“People pay rent first,” Wu says. “It makes no sense that the payment most likely to be made doesn’t boost credit while a late credit card payment can harm credit.”

Other alternative payment data that can serve as more predictive factors for ability to pay, according to researchers, are utility payments, telecom account payments such as cell phone plans, and bank account payment histories.

Stop using credit scores for non-credit decision-making, and stop weighing nonvoluntary debt. There are no data — none — showing that a person’s credit score is predictive of how valuable that individual will be as an employee. Yet credit scores are often used for employment applications, making it harder for people with light or negative histories to advance in their careers. This inability to earn better wages and be better able to pay bills creates a cycle that sets people up to fail.

“Credit scores are not as predictive as people think,” Wu says.

In addition to banning 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 insurance coverage or to open home heating, electric, and other utility accounts necessary to keep homes safe and habitable.

Also credit reporting agencies should be barred from considering nonvoluntary debt, such as debt incurred from medical bills, divorces, or judgments issued in legal disputes over issues that do not involve the kind of payments that would have been reportable to credit agencies in the first place. Records of collections, missed payments, and personal bankruptcy filings remain in the credit system anywhere from seven to 10 years — a period that should be reduced. The system can’t work if people aren’t given the opportunity to lift themselves up if they have fallen.

H. Hopp-Bruce/The Emancipator/Nadia Snopek/Adobe

The announcement by the three largest credit reporting bureaus, Experian, Equifax and TransUnion, to voluntarily eliminate 70% of consumers’ medical debt from credit reports is laudable. However, Black Americans are more likely to carry medical debt, according to the Consumer Financial Protection Bureau, credit bureaus have a poor history of self-policing, and no one should be less able to buy a home, start a business, or get a job because of a past illness or injury. The only just solution is a federal mandate prohibiting the consideration of medical debt in any credit scoring.

Other steps included in Pressley’s proposed Comprehensive Credit Rating Enhancement, Disclosure, Innovation, and Transparency (CREDIT) legislation, which passed the House but has yet to be taken up in the Senate, include prohibiting lenders from charging higher interest rates or otherwise making loans less affordable and riskier to borrowers based solely on lower credit scores. That approach, Wu points out, is what caused the 2008 foreclosure crisis to hit Black communities hardest.

Offer reparations lending through special-purpose credit programs and other measures. Those who have been unable to access credit markets due to the racially disparate bias in credit reporting need an entrance ramp to level the playing field.

One way is through special-purpose credit programs allowed under the Equal Credit Opportunity Act, which offer low- or no-interest lending for home buyers and small business owners to address systemic racism in credit underwriting.

“I call these loans ‘reparations lending’ because that’s really what they are,” Wu says. “They are a form of reparations for the centuries of legalized, deliberate, intentional discrimination. And addressing these inequities is going to require intentional steps.”

Kimberly Atkins Stohr is The Emancipator’s senior columnist, and a senior opinion writer and columnist at The Boston Globe. She may be reached at kimberly.atkinsstohr@globe.com. Follow her on Twitter @KimberlyEAtkins.