The almighty credit score: It tracks the past, predicts the future, and maintains existing hierarchies.

 

By Kirsten Wysen

This is the 7th in a series of EQUITY BLOGS that explores the contexts of longstanding disparities in the health and well-being of King County residents. In addition to helping us understand the root causes of some disparities, the blogs show how tightly history is woven into our lives and our futures. They also acknowledge the rich variability of responses within and across groups and generations, from strength and resilience to lasting harm embedded in policy and everyday life.

 

Charge It: “We are in a consumer credit explosion—a revolution in modern banking.”         

Garrison A. Southard Jr., CA Bankcard Association, 1967

 
 

“… the median value of all financial assets among white households in the United States ($51,500) is more than 17 times that of Latinx households ($3,000), and nearly 13 times that of Black households ($4,000).”

 Andy Nicholas, Budget and Policy Center, 2019

In our increasingly cash-less economy, a person’s ability to borrow money can depend on a single number. The numeric rating scale known as the credit score is used to establish eligibility for and govern the terms of personal loans, mortgages, car loans, and credit cards. Widespread application of this tool helps maintain existing hierarchies in Americans’ access to basic human needs like housing, food, clothing, jobs, education, transportation, and health.

Diners’ Club Credit Card, 1955.  Source:  National Museum of American History

Diners’ Club Credit Card, 1955. Source: National Museum of American History

 History of the credit score

In the 1890s, a Chattanooga, Tennessee grocery store used customers’ history of credit repayment to categorize them as “slow,” “prompt,” or “requires cash.” The proprietor, Cator Woolford, sold his list of customer ratings to other local grocery stores and realized he had discovered a new line of business. In 1898, he and his brother founded the Atlanta-based Retail Credit Company, which sold a “Merchant’s Guide” of customer ratings to businesses in the area.

By the 1950s, more than 1,000 credit agencies were scouring newspapers for notices of arrests, promotions, race, religion, sexual orientation, marriages, and deaths – information they copied onto millions of index cards as they built individual credit files.  These practices raised concerns about privacy and fairness, and eventually led to passage of the 1970 Fair Credit Report Act, which prohibited the collection and reporting of data on race, sexual orientation, and disability.  The 1974 Equal Credit Opportunity Act went further, banning lender discrimination based on race, gender, marital status, or age. Over several decades, the Fair Isaac Company (FICO) developed a method of standardizing credit risk data and in 1989 they introduced the FICO score, which is now used by 90% of lenders.

Figure 1. Credit scores shape access to basic needs that contribute to health and well-being

How are credit scores calculated?

Credit scores range from 300 to 850 and are primarily assigned by three national credit rating agencies. These for-profit organizations (Equifax, Experian and TransUnion) have never shared the actual formulas used to calculate credit scores. They have offered a generic description, however, explaining that the score is derived from a person’s history of past loan and credit card payments (35%), amounts owed (30%), length of credit history (15%), mix of different kinds of credit (10%), and requests for new credit (10%).

While outright discrimination is illegal, the credit score formula works to maintain racial and ethnic group inequities. For example, until 2010 the basic FICO formula counted mortgage payments but generally not rental payments. Whites are almost twice as likely as Blacks to own homes (and make mortgage payments), in part due to decades of federal mortgage and housing policies that explicitly made it difficult for people of color to buy homes.  Although rental payments can now be reported to credit rating agencies, doing so usually incurs a fee: in practice, less than 1% of credit files contain rental payment data.  In an analysis of data for more than 200 cities, the Federal Reserve Bank of Chicago reported that contemporary disparities in home ownership, home values, and credit scores echo disparities in redlined maps from the 1930s.

What if you don’t have a credit score?

Credit scores play an important but often invisible role in the lives of all American adults, especially those without a score. Figure 2 shows the distribution of American adults at different credit-score levels. Notably, about 1 in 5 adults (45 million individuals) have no score at all.

Figure 2. Distribution of adults by credit score and with no credit score, US, 2010

People without a credit score are unlikely to qualify for a credit card, let alone a mortgage or low-interest car loan. For the millions of Americans with no credit scores, options for borrowing money are limited. While some rely on friends and relatives, others turn to payday loans – short-term, high-interest loans that are typically due on the borrower’s next payday.  According to the Consumer Financial Protection Bureau, “a typical 2-week payday loan with a $15 per $100 fee equates to an annual percentage rate of almost 400%.”

Lenders selling predatory loans have historically targeted Blacks and Latinos, and stores selling predatory payday loans are most likely to locate in low-income neighborhoods. Compared to whites, Black adults are 3 times more likely (and Latinos 50% more likely) to use payday loans. These risky loans have higher delinquency and default rates which in turn lower credit scores disproportionately for people of color

Being without a credit scores can also affect car insurance rates, access to cell phone contracts, approval for renting a house or apartment, and ability to rent a car or establish utility service without a security deposit.  

Who has no credit score?

By race/ethnicity. While 16% of white adults have no credit score, the rate is almost twice as high (28%) among both Black and Hispanic adults. Not surprisingly, these differences are roughly mirrored in credit card disparities, with 32% of Blacks and 28% of Hispanic adults reporting they have no credit card, versus 15% of whites.

By place. Almost half (45%) of the residents of low-income neighborhoods lack credit scores versus 9% of those in upper-income neighborhoods. Neighborhood income matters less in rural areas, where credit invisibility is relatively high in all income groups:  upper-income rural residents are at least as likely as lower-income urban and suburban residents to have no credit score. In the Puget Sound region, 17% of adults (466,000 of 2.8 million in King and Pierce County) lack credit scores.

The collective impact of credit scores on community health

Wealth, income, and health are tightly entwined, and credit scores often mediate access to basic needs such as housing and owning a car.

Wealth and income generally provide greater access to physical conditions that promote good health, such as safe homes and neighborhoods, healthy food, and places to exercise. Families with more economic resources are better able to buy or rent homes that are free of lead, which can cause neurological damage in young children, and free of mold and cockroaches, which can trigger asthma attacks. Greater wealth and income permit people to live in neighborhoods with less crime, fewer fast-food outlets and liquor stores, … more parks and green spaces to exercise, … [and fewer] environmental hazards, such as air pollution and other toxic substances.
— Wealth Matters for Health Equity, Robert Wood Johnson Foundation, September, 2018

Intentionally or not, our society’s heavy reliance on credit scores reinforces existing biases and compounds the predicted risks of lending to people of color and those without a credit history.  An upcoming post describes alternative approaches to making lending decisions and allocating resources for basic needs.

***

Kirsten Wysen has worked in health policy and planning at Public Health – Seattle & King County for 19 years, and was a 2018-2019 Policy Fellow at the Center for Advanced Study in the Behavioral Sciences at Stanford University.

LINKS