Credit Scoring Is a Racist, Classist System that Has Us All Trapped

Imagine a ranking system that assigns everyone a number. You don’t opt into this program; you’re automatically enrolled. And there’s no way to opt out. You’re involved whether you like it or not.

You also don’t have any say over the judges, those determining and adjusting your score as you go through life. These judges actually make money off of scoring you.

The worst part is that your opportunities in life—renting an apartment, getting a loan, qualifying for insurance, landing a job—are dependent on your ranking.

Imagine no more, dear readers! For I just described the United States’ system of credit scoring. Supposedly, credit scores are a neutral, unbiased metric for determining a borrower’s risk in the lending market. In reality, they function as a racist, classist trap from which there’s little escape.

Them’s some heavy claims! Don’t worry though: I brought receipts. And lots of them end in .gov so you know they’re legit!

Remind me again how credit works?

If you haven’t yet, peep our explainer on how credit scores work. It’s wholesome, helpful, and barely even mentions racism. You’ll love it.

Our purpose today, however, is to point out the system’s flaws, how they’re features not bugs, and their very real consequences. It’s super depressing! You’re gonna hate it!

In theory…

While contemporary credit scoring wasn’t invented until 1989, banks have standardized the evaluation of individual creditworthiness since 1841. They designed it as a way for financial institutions to measure the risks of lending to a borrower. If someone has a history of late or incomplete loan payments, their credit report tracks those habits. Today creditworthiness tracks through a credit report that generates a score between 300 and 850.

In 1974, the federal government passed the Equal Credit Opportunity Act. This made it illegal to base credit score determinations on demographics like race, gender, nationality, marriage, and religion. The country was in a serious fight for Civil Rights at the time, and those protections were clearly needed.

After that, everything was great and credit scoring never discriminated against anyone ever again! Article over! Bitches out!

In practice…

The United States has decades of experience sneakily discriminating on the basis of race. Take, for example, FDR’s New Deal. Both the National Labor Relations Act of 1935 and the Fair Labor Standards Act of 1938 deliberately excluded agricultural workers from those eligible for union organizing protections, a minimum wage, and overtime protections. “Agricultural workers” doesn’t sound racist on the surface. Yet at the time of the New Deal, 40% of African American laborers made their living in farm work.

Neither Act mentions race. Yet by excluding a vocation dominated by one race, the government neatly and sneakily did A Racism.

Thus also with credit scores.

According to a 2021 Credit Sesame survey, while 37% of white Americans report a suboptimal credit score (620 or lower), 54% of Black Americans report a suboptimal score. And the Consumer Financial Protection Bureau (CFPB) reports that 21 million Americans have no credit history whatsoever. They’re credit-invisible… and predominantly Black and Hispanic people from low-income neighborhoods.

Clearly, the Equal Credit Opportunity Act is… not doing the job. BUT HOW CAN THIS BE?!?

The Atlantic says, “The Equal Credit Opportunity Act doesn’t allow creditors in the United States to discriminate based on race, color, religion, national origin, sex, marital status, age—but taking into account a person’s network could allow creditors to end-run those requirements.” (I’ll explain more about the racist implications of “a person’s network” below.) In other words, the New Deal era tactics for Sneaky Discrimination™ are alive and well in credit reporting bureaus.

You can’t build a solid house on a cracked foundation. The house of credit scoring was built upon a foundation of institutionalized racism. Its cornerstones are slavery and Jim Crow. And a white person owns it because the mortgage lender denied a Black person’s application.

The racism inherent in credit scores

Historical factors created an environment ripe for Sneaky Discrimination™. Again: it’s illegal to factor race into a credit score. But they sure tend to reflect things like generational wealth, educational attainment, and one’s community!

Decades have been spent fertilizing the ground around credit scores for racism to grow. Here are just some of the ways.

Redlining

Some inherit wealth through family homes. But what if your family, because of their race, was excluded from the housing market? Enter the historic practice of redlining.

According to Richard Rothstein’s The Color of Law, redlining was a practice of housing discrimination in which real estate developers, mortgage lenders, local governments, and what we’ll call fucking lynch mobs excluded Black people from certain neighborhoods.

This didn’t just affect the inheritance of generational wealth through real estate. Black people were shunted into segregated communities without access to quality schools, medical care, and public facilities. Overcrowding led to strains on available resources, leading to poor health, education, and career outcomes.

Redlining struck a huge blow to Black communities. Thanks to credit scoring, the problem persists. According to Fortune, “In 2022, Black mortgage applicants were denied at a rate 84% higher than white borrowers. And when they are approved, they often pay higher rates and fees even when adjusted for creditworthiness.”

Exclusion from the GI Bill

The GI Bill, (Servicemen’s Readjustment Act of 1944) included financing for college and housing, as well as unemployment benefits. It was a way to give WWII veterans a hand reintegrating into civilian life. If they were the race that can’t jump, anyway.

Rothstein writes in The Color of Law, “The VA [U.S. Dept. of Veterans Affairs] not only denied African Americans the mortgage subsidies to which they were entitled, but frequently restricted education and training to lower-level jobs for African Americans who were qualified to acquire greater skills.”

VA discrimination was just one case of governmental organizations racisming at Black people just because. And without the same access to education, training, and housing as their melanin-challenged peers, Black veterans and their families fell behind financially.

The criminal justice system

I explained in my review of Michelle Alexander’s The New Jim Crow that communities of color routinely experience over-policing and over-punishment in the criminal justice system. 50% of the prison population is Black, even though only 13% of the U.S. population is. Perfect conditions for more Sneaky Discrimination™.

Considering the ways we disenfranchise convicted felons even after they’ve served their time, a criminal conviction for even the smallest infraction can have disastrous effects on one’s credit score.

For example, ex-convicts can be ineligible for public social benefits and housing. Which is fine as long as you have a decent-paying job to pay for those things yourself! But employers regularly discriminate against ex-convicts in the hiring process… because they can.

So if you’re not allowed a hand up through social welfare and you can’t get a job because of your criminal record, that has a pretty dire effect on your credit score. Not to mention your overall financial stability.

No one starts life with a clean slate. So much of our future success is determined by generational success. The children, grandchildren, and great-grandchildren of those affected by redlining, exclusion from the GI Bill, a racist judicial system, and segregation are still suffering from that legacy of racism in a real, calculable way: their credit scores.

The classism of it all

All of this has contributed to a general financial disenfranchisement of Black people. In many ways, race has become a major determinant of socioeconomic class, Isabel Wilkerson explains in Caste. Credit scoring reinforces this class system.

You’ve probably noticed I’m solely focusing on the disenfranchisement of Black people. This was an intentional choice for simplicity’s sake. But it doesn’t mean other marginalized races are exempt from credit scoring shitfuckery! Here are the current average credit scores by race:

• Black: 677
• Hispanic: 701
• “Other”: 732
• White: 734
• Asian: 745

When a difference of a few points can mean thousands of dollars in interest payments, this disparity should have you shook. But it gets worse.

The credit reporting bureaus and capitalism

Credit scores are determined by a shadowy cabal of dark wizards a handful of publicly traded for-profit companies, the largest of which are Experian, TransUnion, and Equifax. As I said at the top, you don’t get to choose between them. All three track you automatically as soon as you start building credit history.

Their goal? To make a profit. And they don’t particularly care if it’s at the expense of consumers.

That’s because the credit reporting bureaus “are under no legal requirement to be accurate” according to Forbes. And they’re wrong about shit all the damn time!

Imagine you’re a dutiful borrower paying your student loans on time, and your credit score suddenly tanks. You check your credit report and see that you… defaulted on an auto loan??? But you don’t have a car, let alone a whole-ass auto loan. Rather, someone else with the same name defaulted on their loan, and the credit reporting bureau simply tacked it onto the wrong credit report. It’s on YOU to call attention to the error and request they fix it, a lengthy and difficult process with no guarantee of success.

Forbes quotes a recent Congressional Research Service report: “Consumers sometimes find it difficult to advocate for themselves when credit reporting issues arise because they are not aware of their rights and how to exercise them. . . . the Consumer Financial Protection Bureau (CFPB) receives more credit reporting complaints than complaints in any other industry it regulates.’”

Credit score overreach

All of this wouldn’t be so bad if credit scores hadn’t wormed their way into every nook and cranny of our lives. They’re used for every damn thing, even when their relevance is, at best, questionable.

We use credit scoring to determine homeowners, auto, and life insurance; employers use it to judge job applicants; landlords use it to screen potential tenants. Which like… why? Why should your credit score have any-fucking-thing to do with whether or not you’re qualified for a job? What can it possibly have to do with insurance??? Or literally anything other than borrowing and lending money?

Nobody knows! But that’s not stopping the slow creep of credit scoring overreach. The National Fair Housing Alliance reports that “Credit scoring modelers and companies are finding even more creative ways to broaden the use of these systems. A recent proposal in the state of Texas would use credit scores to determine utility rates. Credit scores are even being used to determine which patients are more likely to take their medication as prescribed.”

This is despite there being no evidence (as if that wasn’t obvious) of a correlation between credit scores and insurance losses. Let alone someone’s ability to do their job or take their meds! “Without the need to demonstrate such a connection, insurers could theoretically use any arbitrary consumer characteristic, such as hair color or zodiac sign, that demonstrates a correlation to a specific outcome, to price insurance products,” writes the National Fair Housing Alliance.

Given the infernal relationship between credit and race, when we use credit scoring for purposes beyond lending, Black people experience Sneaky Discrimination™ in these unrelated areas.

A rising tide lifts all boats

Fixing the racist, classist problem of credit scoring would be good for the whole country.

The damage institutionalized racism has done to the economy of course pales in the comparison to what it has done to actual people. Yet it is still the turd cherry on top of this turd sundae… to the tune of $16 trillion in economic losses over the past two decades alone

A CitiGroup report showed that over those two decades…

• Home sales could have increased by $218 billion and 770,000 homeowners through expanding housing credit to Black mortgage borrowers.
• We could have added $13 trillion in business revenue to the economy and created 6.1 million more jobs each year by extending access to business loans to Black entrepreneurs.
• We could have increased the national GDP by 0.2% or $2.7 trillion in personal income by eliminating the disparities between Black consumers and their dancing-challenged peers.

This Sneaky Discrimination™ has hurt us all. It’s infuriating, unnecessary… and completely fixable.

Can we solve racist credit scoring?

That was a lot of really depressing information. Do you need a palate cleanser? Perhaps some puppers to get the taste of institutionalized racism out of your mouth?

Here’s the part where I reassure you that there is a way out of this mess. We can do better. They’re neither easy nor instant, but solutions exist! And it’s up to us to make some noise and advocate for change with the people responsible for setting laws and policy.

Imperfect solutions

Currently, two tactics are at work fixing credit scores.

The first is inclusion of “alternative data” [gulp] in one’s credit report. This usually means cell phone payments, paying your rent—the sort of thing lower-income folks do on the regular. There are even apps that will help you include this alternative data in your credit report (though we can’t vouch for them yet).

The second is the 2020 Protecting Your Credit Score Act, an amendment to the Fair Credit Reporting Act (FCRA). This bill requires strict guides about the accuracy of data, transparency of data, and making it easier for us to correct false information on our credit reports. Alas, the bill died in the Senate, though there’s hope of reviving it.

The problem with both of these solutions is that they don’t account for the generational history of racism inherent in credit scores. They’d both be great practices going forward… but they don’t heal past wounds.

Practical solutions

The National Consumer Law Center outlines some options for reducing the harmful impact credit scores have on racial minorities. They stress that solving the crisis requires a fork, not a knife (a multi-pronged approach, that is… though I suppose one could spork it too).

Here’s what they recommend:

• Reducing the time limit on negative information: Currently, bad credit practices like late or incomplete payments stay on your credit report for seven to ten years. The NCLC recommends shortening that to three years.
• Stopping credit score overreach: Making it illegal to use credit scores to determine insurance rates, employment, and housing leases would go far to halting this whole Sneaky Discrimination™ thing in its tracks.
• Placing limits on risk-based pricing: Right now, lenders charge higher interest rates to folks with lower credit scores. Restricting how high those interest rates go can help prevent those with low credit scores from getting trapped in debt.
• Expanding special purpose programs: Under the Equal Credit Opportunity Act, special programs increase access to credit for those with low credit scores. We should increase eligibility and access to these programs.
• Creating a public credit registry: Perhaps the hardest change to implement will be replacing the for-profit credit reporting agencies with a government-funded public credit registry, one that accounts for generational discrimination. Why didn’t they design it this way in the first place???
• Improving the algorithms: The algorithms that currently determine credit scores don’t account for historical discrimination in any way. But with some intentional tweaking, they could… and that would go a long way to eliminating the harm of past systemic racism from current credit scoring models.

Guys… I read three whole books for this article. The research consumed me for weeks. And there’s still more to tell! I’ll be following up with an article about how to successfully challenge errors on your credit report. So if you benefitted from this level of in-depth research and mildly irreverent explanation, consider gifting us with a donation: