How Credit Scores Perpetuate Racial Injustice In America
Black Americans are more likely than ever to struggle to gain equal access to the financial world.
July 01, 2018 at 1:09 am
Black families in America have been disproportionately more likely to live in poverty than white Americans since the end of the Civil War, and that hasn’t changed today. In fact, with the development of economic indicators like credit score, black Americans are more likely than ever to struggle to gain equal access to the financial world.
Credit scores were developed to measure an individual’s financial trustworthiness based on a number of factors. In theory, this system weeds out people who are likely to default on loans and fail to meet their bills. In practice, it enforces racial inequality and leaves black Americans trapped in a cycle of poverty that is becoming increasingly difficult to climb out of. Evidence suggests that black wealth is disappearing faster than ever, and median wealth for black Americans will fall to $0 by 2053.
When history determines your score
One of the biggest components of credit score is family income and location. On paper, companies are not supposed to take your race into account when they determine whether to lend to you or not. In reality, there are a number of other indicators in your credit history that can reveal your race and expose you to discrimination, even without data explicitly collected on your race.
For example, a long-standing practice that has enforced a racial divide is the practice of redlining districts. This is when banks will systematically deny blacks and other minorities loans or mortgages that they would approve for non-black applicants in the same financial situation. Evidence suggests this is a widespread problem that takes place across the United States, affecting millions of black Americans every year.
What location you grew up in also affects your credit score, as well as your family history. They may not directly affect the number calculated, but people who grow up in areas where the use of collection accounts is the norm may not learn good credit habits that can enable them to improve their credit. Access to credit education is passed down, and black Americans are often left out of the loop.
In addition, bills that low-income people may be able to pay consistently — like cell phone bills and electricity bills — are not included on credit history. The bills minorities are able to point to in order to prove they can pay bills reliably simply don’t count. Essentially, you need credit history to earn better credit.
Minorities get denied economic opportunities
Another issue is that credit score is determined by income, and minorities often receive lower income than their white counterparts, even for the same labor. So black Americans get hit with a double whammy: their paychecks are smaller, and their access to opportunities for economic growth are thereby closed.
This means things like loans and mortgages, which can provide opportunities for financial improvement, wealth accumulation and growth, become inaccessible. Black Americans can’t get the funding to start a small business, purchase a house that can be passed down or obtain student loans with a good interest rate in order to go to college and get better economic opportunities. Pre-existing poverty begins holding back black Americans. It’s no wonder statistics indicate that upward mobility is rapidly disappearing in the United States. Today, chances are if your family is poor, you will be too.
Instead of gaining access to mainstream lending through secure financial institutions, black Americans are left with few options but to turn to predatory lenders who are likely to set up shop in low-income areas and prey on people who don’t know better and don’t have better opportunities. This can, in turn, lock black Americans into debt they cannot realistically get out of, further maintaining the cycle of poverty.
Credit scores in the United States do more to prevent someone from sliding in and out of particular social classes than they do provide opportunities for financial improvement. The result is that they continue to perpetuate racial injustice against black Americans and other minorities living in poverty today.