Credit Scores And Economic Opportunity (Progress Illinois)

By Adam Doster

September 15, 2010

It's common knowledge that the income gap between black and white Americans is on the rise. Less understood is the nation's enormous and persistent racial wealth gap, which takes into account the amount of assets a household owns versus what they owe. A report released earlier this summer from Brandeis University found that the disparity, at nearly every level of income distribution, has four-fold over the past quarter-century. In Illinois, 51 percent of African Americans and 48 percent of Latinos don't have enough financial assets to get them through times of economic stress. For whites, the figure is just 19 percent. And poor credit exacerbates the problem.

Having a good credit score has always been important. Without one, a borrower is seen as a potential risk. It's harder to take out an affordable mortgage, acquire an auto loan, or qualify for a credit card that carries reasonable rates.

Increasingly, credit scores are being incorporated into a more diverse range of financial decisions: landlords often ask prospective tenants to provide a credit score, insurance and utilities, and mobile phone companies can deny access or charge higher fees for customers with a poor rating, and employers can refuse to hire an applicant with a subpar financial history. "Clearly, credit scores have become central to the ways institutions make decisions," said the Woodstock Institute's Geoff Smith on a conference call this morning.

Yesterday, Smith's organization published a detailed report on the demographics of credit. Using data from a leading national credit bureau, their finding are both startling and predictable. In Illinois, individuals living in communities of color were far more likely to have "non- prime" credit scores while individuals in predominantly white communities were much more likely to have a "prime" credit rating. The former neighboods, meanwhile, are much heavily concentrated in the state's largest metropolitan areas. Here's a chart Woodstock produced breaking down the geographic data:

[chart]

How wide is the gap? Forty-three percent of individuals in black neighborhoods, for example, had credit scores below 580. (In the United States, scores range from 250-850 with the median at 723.) For individuals in heavily Latino or white communities, those figures (roughly 22 percent and 11 percent, respectively) were much lower. On the flip side, 56 percent of whites had scores above 740. For blacks, only 17 percent reach that level.

Earlier this summer, Gov. Pat Quinn signed a law making it illegal for Illinois employers to run credit checks on job applicants. U.S. Rep. Luis Gutierrez has called for a federal bill modeled after Illinois' efforts. More can be done early to bridge the credit gap before it widens further. Woodstock suggests that lawmakers provide funding and support to credit counselors who help people repair battered credit scores. The non-profit Credit Builders Alliance could be an amazing resource in this effort, thanks to the detailed curriculum it offers strained borrowers. With the state budget in tatters, Smith recommends Illinois use this new demographic research to target its outreach into communities most afflicted with poor credit. Expanding access to reasonable small-dollar loans, which are more likely to be paid on time and in full than other alternatives on the market, would also help.

Federally, the consumer advocates also recommend the adoption of "full-file" reporting. In most jurisdictions, one's credit score reflects variables like type of credit used, length of history, debt, and missed payments. Full-file would require that additional data -- such as on-time loan repayments or steady payments for things like utilities or rent -- be entered into those calculations.

Of course, when there's not enough income coming in the door, poor credit often follows. In that sense, there's no better antidote to the asset gap than reducing the staggering level of economic stagnation and unemployment in low-income neighborhoods statewide. Doing that will take a serious commitment from our statewide elected officials.

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