Credit scores are meant to be race neutral. It’s impossible
EDITOR’S NOTE: In a 10-part Sunday series titled “Sincerely, Michelle,” Michelle Singletary speaks personally about misconceptions about race. This is the fourth column in the series, but each is also independent.
Funny how you remember some memories, like the time my grandma Big Mama yelled at a customer rep to call her about her car loan. The lender was trying to say that my grandmother had missed her monthly car payment, even though she always paid her bills not only on time but early.
Big Mama was in the kitchen doorway, talking on the rotary phone. I was watching television not far away.
“No sir, you better check your records,” my grandmother said, punctuating her words in very salty language.
The only thing you never did was accuse Big Mama of being late for anything, especially her financial obligations. This woman was pacing the front door of her Baltimore townhouse, waiting for the postman so she could go pay the bill that arrived the same day.
During that phone call, Big Mama pulled out the little red book where she wrote down her financial information and read the names, dates and amounts to prove that her payment was made. By the time my grandmother finished, I felt sorry for the person on the other end of the phone.
I was thinking of Big Mama the day I found out I had a perfect credit score of 850 on four different credit score models. If my grandmother was still alive, I would have rushed to show her.
“Never be late with the white man’s money,” Big Mama preached. It was her legacy for me, the constant worry about ruining your credit history because, for her, a late payment meant being even more marginalized.
Another misconception about black people is that we are financially irresponsible, as evidenced by disproportionately lower credit scores. But if you research the root cause of bad credit history, you will discover a set of discriminatory practices.
In America, we like to think that everyone has an equal chance to succeed, that meritocracy – skill and effort – eliminates prejudice. You’ve heard the tropes of traction through your boots which all boil down to this: If you work hard enough and save money, you can also be financially secure, even rich.
But the legacy of slavery lives on and blacks must make extraordinary efforts to overcome the discrimination that is often hidden in policies or, in the case of credit scoring, products that claim to be neutral vis-à-vis. of the race.
Please don’t shake your head thinking, “Stop making excuses for black people failing to get up. “
To that, I would say that if you intentionally – or even unintentionally – trip someone and they fall and get hurt, you can’t turn around and say, “It’s your fault you fell. You should have watched where you were walking. . “
America must stop tripping black people.
Look at the calculation of credit scores, which help lenders assess risk when granting credit, car insurance, or considering someone responsible enough to rent an apartment. Credit scores generally range from 300 (bad) to 850 (excellent). The most used is the FICO. Its main rival is VantageScore, a scoring model that is a joint effort of the three major bureaus – Equifax, Experian and TransUnion.
Before the advent of the triple-digit credit score, a consumer loan depended largely on a face-to-face application process. What stood between you and a home or car loan was a white loan officer. That’s why my grandmother was obsessed with her bill paying habits.
The credit score is supposed to eliminate bias. The Equal Credit Opportunity Act 1974 prohibited credit scoring systems from using information such as gender, marital status, national origin, religion or race.
This would suggest that credit score calculations cannot be biased. But the factors that are included or excluded in the algorithms used to create a credit score can have the same effect as loan decisions made by prejudiced white loan officers.
While credit scoring models cannot directly use a consumer’s race to calculate a score, there are other, less obvious ways the system puts blacks at a disadvantage.
Decades of discrimination in employment, loan policies, debt collection, and even criminal prosecution have left black families struggling to make ends meet. Let me explain to you how that sounds about credit scores.
One way to achieve a good credit rating is a history of responsible credit use. The ability to get a mortgage and pay it off on time can have an extremely positive impact on your credit score.
Blacks still face “redlining,” a rating system approved by a federal government agency – the Home Owners’ Loan Corporation – that has designated black neighborhoods as too risky for mortgages. A 2018 study by the National Community Reinvestment Coalition (NCRC) found that “although redlining is illegal today, having been banned under the Fair Housing Act of 1968, its lasting effect is still evident in the structure of American cities ”. Access to credit is “a foundation for economic inclusion and wealth creation in the United States,” according to the report.
To fill part of the credit gap, black-owned banks stepped in to serve black communities. But the number of black-owned banks has declined by more than 50% since 2001, according to a recent report from the Urban Institute.
Thus, blacks discriminated against in mortgage loans often turn to more expensive predatory loans. Or, they just rent.
But rent payments are not included in the old credit scoring models. While some lenders have updated newer scoring models that include a loan seeker’s rent payments, many have not. Ignoring these and other bills – such as utility or cell phone payments – disproportionately harms black people.
The way to a good credit score is to pay your bills on time. But blacks already economically backward because of systemic racism have less recourse in the event of a financial crisis. This, in turn, has an impact on their credit scores.
A quick way to improve your credit score is to get a court ordered judgment. And black borrowers are more likely to fare badly when sued by their creditors. Debt collection lawsuits that end in default judgments also go disproportionately against black people, according to a 2020 report from Pew Charitable Trusts.
What happens next creates a negative credit snowball. A crisis hits and black borrowers cannot pay their debts. They are already more likely to be underpaid. Reports have shown that creditors are more likely to sue black borrowers. The judgments are then reported to the credit bureaus, further lowering the credit scores of black consumers.
“Debt collection lawsuits that end in a default judgment can have lasting consequences for the economic stability of consumers,” the Pew report said. “In the long run, these consequences can hamper people’s ability to obtain housing, credit and employment. “
The disparity in criminal justice that treats blacks much harsher than whites for similar crimes has created a pipeline to prison, starting with more severe discipline of black schoolchildren.
When ex-offenders fill out job applications, many have to check a box indicating whether they have been convicted of a felony. That checked box becomes a mark that prevents them from getting jobs or even interviews. The NAACP and the National Employment Law Project support “ban-in-the-box” initiatives that have led to legislation banning hiring policies that screen out black applicants without assessing the nature and severity of each individual case.
“When returning offenders can find and keep legitimate employment, they are more likely to be able to reimburse their victims, provide for their children and prevent crime,” a 2010 report from Pew noted.
And, by the way, racist policies thwart black people no matter how responsible they are. Blacks are routinely charged higher interest rates on home and auto loans, even when the amount financed, loan term, and creditworthiness are checked.
Credit inequality is significant. It contributes to the wealth gap. And closing that gap requires, in part, recognizing and eliminating the systems that, intentionally or unintentionally, have stumbled black people.
Readers may write to Michelle Singletary c / o The Washington Post, 1301 K St., NW, Washington, DC 20071. Her email address is [email protected]. Follow her on Twitter Where Facebook. Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note that comments or questions can be used in a future column, with the author’s name, unless a specific request is indicated..