New report finds dramatic gap in credit scores between communities of color and predominantly white communities in Illinois

There are sharp disparities in credit characteristics between communities of color and white communities in Illinois, a new report from Woodstock Institute found. “Bridging the Gap: Credit Scores and Economic Opportunity in Illinois Communities of Color” analyzed credit score data from a major national credit bureau for the State of Illinois and found that 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 “prime” credit scores.

Statewide, 20.3 percent of people had credit scores below 620, a common boundary for consideration for prime credit. In contrast, 54.2 percent of the population in highly African-American neighborhoods had scores below 620 and only 16.5 percent of the population in predominantly white neighborhoods credit scores below 620.

The report found tremendous polarization in credit score distributions. Highly African American communities were almost four times as likely to have individuals with credit scores in the lowest range as predominantly white communities, while predominantly white communities were more than three times as likely to have individuals with credit scores in the highest range as highly African American communities.

In highly African American communities, 43.3 percent of individuals had a credit score below 580, compared to 11.5 percent in predominantly white communities. On the other end of the spectrum, 56.7 percent of individuals in predominantly white communities had credit scores above 740, compared to only 17.6 percent of individuals in highly African American communities.

In Illinois’ larger metropolitan areas, a large percentage of zip codes had high levels of individuals with low credit scores. Almost twice as many zip codes in Chicago had more than a quarter of individuals with credit scores in the lowest range as zip codes in non-large-metro areas.

15.3 percent of zip codes in the Chicago metropolitan area and 13.8 percent of zip codes in Lake County had more than 25 percent of individuals with credit scores below 580. In contrast, only 8.9 percent of zip codes in non-large-metro areas had more than 25 percent of individuals with credit scores under 580.

“The concentration of individuals with low credit scores in communities of color means they likely face more limited access to economic opportunity than people living in white communities,” says Geoff Smith, Senior Vice President of Woodstock Institute. “It is becoming more common for landlords, insurance and utility companies, and employers to incorporate credit scores and credit report data into decision-making processes. Individuals with credit scores in the lowest range will have a far more difficult time accessing rental housing, low-cost mortgages, utilities, auto loans, and credit cards than will individuals with higher credit scores.”

From a community development perspective, policymakers, neighborhood planners, and financial institutions may have to take different approaches in communities with high concentrations of individuals with low credit scores as lenders increasingly tighten underwriting criteria for home mortgage and small business loans.

Some strategies include:

Support efforts to build credit for credit-underserved populations;

Use additional data to build credit;

Use manual, relationship-based underwriting.