CREDIT SCORES ARE SUPPOSED TO BE RACE-NEUTRAL. THAT’S IMPOSSIBLE. Blacks must make extraordinary efforts to overcome the discrimination that is often hidden in financial policies or products that are supposed to be bias-free.
By Michelle Singletary OCTOBER 16, 2020
It’s funny how certain memories stick with you — like the time my grandmother Big Mama cussed out a customer representative calling about her auto loan. The lender was trying to say my grandmother had missed making her monthly car payment, even though she always paid her bills not just on time but early.
Big Mama was in the doorway of the kitchen, talking on the rotary telephone. I was watching television not far away.
“No, sir, you better check your records,” my grandmother said, punctuating her point with some very salty language.
The one thing you never did was accuse Big Mama of being late for anything, especially her financial obligations. That woman would pace near the front door of her Baltimore rowhouse waiting for the letter carrier so she could pay whatever bill arrived that same day.
During that phone call, Big Mama pulled out the little red book in which she jotted down her financial information and read names, dates and amounts to prove her payment was made. By the time my grandmother was done, I felt sorry for the person on the other end of the line.
I was thinking of Big Mama the day I found out that I had a perfect 850 credit score on four scoring models. If my grandmother were still living, I would have rushed over to show her.
“Don’t ever be late with the White man’s money,” Big Mama would preach. This was her legacy to me — the constant worry about ruining your credit history — because for her, a late payment meant being further marginalized.
Yet another misconception about Blacks is that we are financially irresponsible, as evidenced by disproportionately lower credit scores. But if you trace the root cause of the poor credit histories, you’ll find a pattern of discriminatory practices.
In America, we like to think that everyone has an equal opportunity to succeed, that meritocracy — skills and effort — eliminates bias. You’ve heard the pull-yourself-up-by-your-bootstrap tropes that all come down to this: If you work hard enough and save, you, too, can be financially secure — even rich.
But the legacy of slavery endures, 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 purport to be race-neutral.
Please, don’t shake your head, thinking, “Stop making excuses for the failure of Black people to lift themselves up.”
To this I would argue, if you purposely — or even unintentionally — trip someone and he or she falls and gets hurt, you can’t turn around and say: “It’s your fault you fell. You should have watched where you were walking.”
America has got to stop tripping Black people.
Look at the calculation of credit scores, which help lenders assess risk when granting credit, insuring automobiles or deeming someone responsible enough to rent an apartment. Credit scores typically go from 300 (bad) to 850 (excellent). The most widely used is the FICO. Its chief rival is VantageScore, a scoring model that is a joint effort by the three major bureaus — Equifax, Experian and TransUnion.
Before the advent of the three-digit credit score, a consumer loan depended in large part on a face-to-face application process. What stood between you and a home or auto loan was a White male lending officer. This is why my grandmother was obsessive about her bill-paying habits.
The credit score is supposed to eliminate bias. The 1974 Equal Credit Opportunity Act barred credit-score systems from using information such as sex, marital status, national origin, religion — or race.
This would lead one to think that credit-score calculations can’t be biased. But factors that are included or excluded in the algorithms used to create a credit score can have the same effect as lending decisions made by prejudiced White loan officers.
Although credit scoring models can’t directly use a consumer’s race to calculate a score, there are other less obvious ways that the system puts Blacks at a disadvantage.
Decades of discrimination in employment, lending policies, debt collection and even criminal prosecution have left Black families struggling to make ends meet. Let me walk you through how that dings credit scores.
One path to achieving a good credit score is a history of responsible credit usage. The ability to get a mortgage and pay it on time can have an extremely positive impact on your credit score.
Blacks still have to contend with “redlining,” a rating system endorsed by a federal government agency — the Home Owners’ Loan Corp. — that designated Black neighborhoods as too risky for mortgage lending. A 2018 study by the National Community Reinvestment Coalition found that “while overt redlining is illegal today, having been prohibited under the Fair Housing Act of 1968, its enduring effect is still evident in the structure of U.S. cities.” Access to credit is “an underpinning of economic inclusion and wealth-building in the U.S.,” the report said.
To fill some of the lending gap, Black-owned banks stepped in to serve Black communities. But the number of Black-owned banks has declined by more than 50 percent since 2001, according to a recent Urban Institute report.
So Blacks who are discriminated against in mortgage lending often turn to higher-cost predatory loans. Or, they just rent.
But rental payments are not included in older credit scoring models. Although some lenders have updated to newer scoring models that include a loan applicant’s rental payments, many have not. Neglecting to consider these payments and other bills — such as utility or cellphone payments — disproportionately hurts Blacks.
The route to a good credit score is to pay your bills on time. But Blacks already economically behind because of systemic racism have less to fall back on when a financial crisis hits. This, in turn, results in a hit to their credit scores.
One quick way to tank your credit score is to get a court-ordered judgment. And Black borrowers are more likely to fare badly when taken to court by their creditors. Debt-collection lawsuits that end in default judgments also disproportionately go against Blacks, according to a 2020 Pew Charitable Trusts report.
What happens next creates a negative-credit snowball. A crisis hits, and Black borrowers can’t pay their debts. They already are more likely to be underpaid. Reports have shown creditors are more likely to sue Black borrowers. The judgments are then reported to the credit bureaus, further dragging down the credit scores of Black consumers.
“Debt collection lawsuits that end in default judgment can have lasting consequences for consumers’ economic stability,” the Pew report said, adding, “Over the long term, these consequences can impede people’s ability to secure housing, credit, and employment.”
The disparity in criminal justice that treats Blacks far more harshly than Whites for similar crimes has created a pipeline to prison, starting with the harsher disciplining of Black schoolchildren.
When ex-offenders fill out job applications, many have to check a box indicating whether they’ve been convicted of a crime. That checked box becomes a brand that prevents them from getting jobs or even interviews. The NAACP and the National Employment Law Project support “ban the box” initiatives that have led to legislation to prohibit hiring policies that screen out such applicants without assessing the nature and gravity of each case individually.
“When returning offenders can find and keep legitimate employment, they are more likely to be able to pay restitution to their victims, support their children and avoid crime,” a 2010 report by Pew points out.
And, by the way, racist policies thwart Blacks no matter how responsible they are. Blacks are consistently charged higher interest rates on home and auto loans even when controlled for the amount financed, the term of the loan and creditworthiness.
Credit inequality matters. It contributes to the wealth gap. And part of closing that gap is acknowledging and eliminating systems that, intentionally or not, have been tripping up Blacks.