When you look at the numbers, you can’t ignore the racial disparity in credit scores.
According to a 2022 report from the Urban Institute, a non-profit think tank. FICO defines subprime as poor or just below 670 credit scores.
A low credit score or no credit history can make borrowing difficult and expensive. If you can’t access good credit products, you may struggle to build wealth. Here’s how discrimination can affect credit scores and what you can do to build and protect your credit.
How Credit Scores Are Developed
Your credit scores are derived from your credit report data compiled by the three major credit bureaus: Equifax, Experian and TransUnion.
Scoring systems are based exclusively on the information in these reports, says credit expert John Ulzheimer, formerly of FICO and Equifax. “Race is never on the report and not considered in a score,” he says. “Nor is it your address or a zip code where racial diversity is different.”
Lenders provide credit bureaus with a constant stream of consumer credit information, such as the date you opened an account, the balance, and whether the account is paid on time.
For revolving credit products, such as credit cards, the line of credit amount will appear on your credit file. Collection agencies and courts also provide data to credit bureaus, which means collection accounts and bankruptcies appear.
Credit scoring companies, such as FICO and VantageScore, use proprietary algorithms that emphasize different factors to create scores between 300 and 850. Higher numbers predict lower credit risk, and scores may change as credit reports are updated.
To get a credit score, you must first use credit products reported to the credit bureaus. But to build a good credit rating, you need to use these products responsibly for a long time.
So, in theory, credit scores shouldn’t be affected by race. But an individual’s credit rests on their history, and for black Americans, that history may well include a lack of generational wealth in part because of past discriminatory practices like redlining, which denied mortgages in minority neighborhoods. Although redlining was banned in the 1960s, black homeownership still lags behind; the National Association of Realtors reported that in 2020 homeownership rates were approximately 72% for white households, 62% for Asians, 51% for Hispanics, and 43% for blacks.
Average Credit Score by Race
Credit scores differ significantly when broken down by race. The credit card processing company Gap found these average FICO scores in 2021:
- Asian, 745.
- White, 734.
- Hispanic, 701.
- Black, 677.
Then there is the issue of credit invisibles, or people with no credit history or report to one of the three bureaus. If you don’t do business with companies that report to the credit bureaus, you will be penalized when applying for credit. A thin credit file seems more risky to lenders, leading to loan denials or higher interest rates for the borrower.
About 15% of black and Hispanic consumers are considered invisible credits, compared to 9% among white and Asian consumers, according to the most recent Consumer Financial Protection Bureau The data. An additional 13% of black consumers and 12% of Hispanic consumers have unrated records, compared to 7% of whites.
How Lending Discrimination Affects Borrowing Opportunities
Discrimination in lending prevents qualified borrowers from seeking housing in certain neighborhoods and building wealth through home ownership.
Ulzheimer points to a recent case of loan discrimination affecting borrowing opportunities. The CFPB and the Justice Department found that Trident Mortgage Co. deliberately discriminated against families living in majority-minority neighborhoods in the Philadelphia area and ordered the company to pay more than $22 million in damages.
Tiffaney Williams, an Atlanta credit educator with a doctorate in commerce from Trinity International University, has witnessed the discrimination in lending.
“I’ve had clients with the exact same scores and nearly identical financial situations,” Williams says. “The minority was rejected. My white client’s credit application was accepted on the exact same day.”
She adds, “It also weighs heavily on the client’s trust to build credit and wealth, which drives them away from their goals.”
Other race-related factors that hurt credit scores
Disparities in wealth, student loan debt, and financial literacy are factors that can hurt the credit scores of different racial groups. Much of the problem with credit scores stems from the income gap, says Ramona Ortega, founder of My Money My Future, a financial services company that helps millennials of color build wealth.
The difference between “the average wealth of a white family and that of a colored family is huge,” Ortega says. “That alone impacts credit scores. If you have a higher income, you’re more likely to pay your bills on time and you’re offered higher credit limits.”
The median income in 2020 for black households was $45,870, compared to $55,321 for Hispanics, $74,912 for whites, and $94,903 for Asian households, according to the United States Census Bureau.
Regardless of income after graduation, black households have more student debt, which can hurt their creditworthiness, reports the Brookings Institution. Student loans can be problematic for credit scores, Ortega says.
According to a 2022 report from the Education Data Initiative.
Credit misinformation can also harm communities of color, Ortega says. The meaning is that “all credit is bad,” she says, leading to avoidance of traditional credit products.
Some types of credit favored by black borrowers, such as payday loans, are not factored into credit scores. According to a Brookings Institution analysis.
How to build credit
Ask for a secured credit card. A secured card may be easier to obtain than a traditional unsecured credit card, as it requires a cash deposit as security in case of default. The deposit you will need to make depends on the credit card and the deposit is usually equal to the credit limit.
Shop around to see which credit cards best suit your needs and because some may charge annual fees and other fees. Also check if you can automatically switch to an unsecured card and get your deposit back after a certain number of on-time payments.
Become an authorized user. Ask a trusted family member or friend to add you to a credit card as an authorized user. Whether or not you use the card, it will show up on your credit report and help you build your credit. Just make sure the card reports authorized users to the credit bureaus.
Choose a cardholder with a long history of paying on time and keeping balances low. If you or the cardholder rack up charges or miss payments, both of your credit ratings will suffer. However, only the cardholder is responsible for the balance.
Consider a card from a local bank or credit union. A community bank or credit union is a good starting point for a quality credit product that falls under credit bureaus, Ortega says. These financial institutions often understand the needs of the community and have a stated mission to help their customers and members move forward.
Get a store credit card. These may be easier to obtain than many unsecured cards. One caveat is that store cards tend to charge higher interest rates than other cards, which means you still have to pay your balance.
Be responsible for your credit. If you have revolving credit accounts, make sure you always pay on time, keep your balance below 30% of your credit limit, and try to pay your bill in full each month.
Receive a credit for the payment of rent and utilities. You or your landlord can sign up for a rent reporting service to put your rent payments on your credit report. You can also add points to your credit score with Experian Boost, a free service that gives you credit for timely payments from utilities, telecommunications, and some streaming services.
Use resources for underserved communities. For example, the national Thrive initiative provides financial education opportunities for black and Latino consumers.