Race and Credit

While a credit score is just a number with no race or ethnic background, the person behind does have a background and this can affect their score.

This connection can first be seen by looking at people’s income and place of residence. There are clear gaps in income based on racial lines in our country, and neighborhoods are still racially divided decades after desegregation. People with higher incomes have more power to pay off loans quickly, don’t run out of money before their next pay check arrives, own better homes and therefore have better credit scores. People in low income neighborhoods typically rent their housing and live from paycheck to paycheck. If something is to go wrong between these checks and a family needs more money, they are often forced to seek out a service such as pay-day lending. These loans charge extremely high rates of interest and take several months to recover from. Predatory lenders understand these trends and set up shop in these areas.

Another way credit is influenced by background is through family history. While parent’s credit scores don’t directly affect the scores of their children, they do have a way of impacting them. Parents have a large impact on the habits of their children and this is no different when it comes to fiscal responsibility and good credit habits. Studies have even shown that someone is more likely to take out a pay-day loan if their parents have used the service before. Another impact comes when the child graduates’ high school. It is time to go to college, and that most likely involves taking out a student loan. A parent with great credit can assist their child in lowering the interest rate by cosigning the loan. This makes it easier for the child to choose better schools, not work as many hours on the side to pay the loan and focus on graduating and getting a good job. This trend of bad credit lines in families has been promulgated by a system that targets minorities and keeps them tied to neighborhoods and services that keep them in a bad position. This only further affects them as their credit score will be used when they try to move away from these neighborhoods, look for better jobs, and apply for further education. The current credit model needs to be changed and predatory practices will need to cease in order for all people to have the same financial ability.