February 27, 2024 — Issue Brief

Credit reports and scores reflect stunning racial disparities. Study after study has found that Black and Latino communities have lower credit scores as a group than whites and Asians. The racial disparities in credit scores are due to deep structural factors, created by centuries of intentional and legalized discrimination as well as present-day biases.  

Communities of color have less income, but the disparity in wealth is even more stunning: the typical Black family has a median wealth of only about 15 percent ($44,900) of the typical white family ($285,000), and the typical Latino family has only about 20 percent ($61,600). With fewer assets to draw on, people of color – and the friends and family who they might turn to – are far less able to cushion the blow of financial catastrophes, such as job losses, income reductions, sickness, or unplanned expenses. Less wealth also means that Black students borrow significantly more in student loans for higher education.  

This racial wealth gap didn’t happen by accident. It was caused by centuries of discrimination, redlining, and ongoing employment discrimination. Black and Latino individuals are disproportionately targeted by law enforcement, which has a devastating economic impact. They also disproportionately bear the financial burdens from the criminal legal system in the form of fines, fees, and debt. Credit scoring is a reflection of the racial economic divide and wealth gap in this country. Yet is a gatekeeper for many important necessities – employment, housing (both rental and homeownership), insurance, and of course, affordable credit.  

Reducing the harm to Black and Latino communities from the racial disparities and history of discrimination baked into credit scores requires a multi-pronged approach, including:

  • Stop the Mission Creep.  Ban the use of credit information in rental housing and insurance.  Severely restrict the use of credit history in employment.
  • Restrict Risk-Based Pricing. With risk-based pricing, lenders charge higher rates to consumers with lower credit scores.  Interest rates should not exceed 36% for small loans and lower for larger ones, as higher rates exacerbate racial injustices by placing borrowers in a debt trap that only worsens their economic situation.
  • Expand Special Purpose Programs. These programs are specifically aimed at increasing access to credit for underserved communities, especially communities of color, and are explicitly permitted under the Equal Credit Opportunity Act.  
  • Reduce Time Limits on Negative Information. Another option is to reduce the time limits on negative information in credit reports to three years as a way to minimize the vicious cycle aspect of low credit scores.
  • Develop Intentionally Improved Algorithms. A promising reform is the development of algorithms designed to reduce racial disparities. Scoring models and algorithms need to be refined and improved with an intentional focus on reducing racial disparities.  The income disparities and wealth gaps reflected by credit scores were the product of centuries of intentional discrimination and cannot be reduced without the same level of intentionality.
  • Create a Public Credit Registry.  A public credit registry could develop credit scoring model that actively takes past and present discrimination into account and is intentionally designed to reduce racial disparities

Caution should be exercised in using alternative data as a reform, because it can also be extremely damaging to consumers.  For example, unless it only uses positive data, rent payment reporting can create enormous harms for struggling renters. Alternative data will not eliminate racial disparities in credit scores, because any data that relies on financial information will still reflect racial disparities given the unequal economic positions of households of color and white households.