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For many individuals of color, America’s racial wealth gap extends to credit access, too.
Today’s credit scoring system was designed, following the passage of the Equal Credit Opportunity Act in the 1970s, to eliminate bias among lenders by preventing them from considering factors like an applicant’s race, sex, religion and marital status, among others.
That said, the existing system is still criticized for its reliance on factors that can be affected by inherent biases and generational wealth disparities — including income and home ownership.
Today, those disparities are evident in the lower credit scores and lack of credit access for some people of color compared to other demographics in the U.S.
Credit and race statistics
- 40 percent of Black Americans say they do not have any personal credit cards, compared to 21 percent of white Americans and 26 percent of Hispanic Americans. (Bankrate survey)
- Majority-Black and majority-Native American communities have the lowest median credit scores and highest rates of subprime credit scores. (Urban Institute)
- Among homebuyers, people of color tend to have the lowest credit scores. The average American homebuyer has a credit score of 728, while Black homebuyers and Hispanic homebuyers have average scores of 677 and 701, respectively. (Brookings Institution)
- Black and Hispanic Americans may be underbanked, a problem stemming from lack of access to banks caused by issues such as redlining — a discriminatory lending practice that limited access to credit products to consumers living in areas deemed financially risky. The average “redlined” neighborhood is 32 percent Black and 30 percent Hispanic. (NCRC)
- Non-white Americans are more likely to have more credit card debt than emergency savings. Fifty-eight percent of Black Americans and 47 percent of Hispanic Americans say they have more debt than savings; just 30 percent of white Americans say the same. (Bankrate survey)
One of the more significant examples of discriminatory practices that’s had a lasting impact is redlining. During the mid-20th century, when this practice was most prevalent, neighborhoods were often divided along racial lines. Banks would assess the risk of providing loans based on the racial makeup of the neighborhood, rather than on each individual’s creditworthiness.
Neighborhoods affected by redlining were predominantly Black, Hispanic and Asian American. Although redlining is technically illegal now, its legacy — according to some researchers — has contributed to the wealth gap that continues to exist along racial lines today.
Native Americans have also been impacted by land issues, including forced migration which involved the systematic removal of Indigenous peoples from their ancestral lands by European settlers and the U.S. government.
This forced migration not only created land issues for Native communities, but it has also contributed to the ongoing challenge of accessing financial services. Many reservations are located in remote or economically disadvantaged areas, making it difficult for financial institutions to establish branches or provide services. This, in turn, can limit access to credit products and investments — the same products many majority-white communities can easily access.
Credit scores by race and ethnicity
A low credit score can affect many different aspects of your financial journey throughout life. When you have poor credit, not only is it more difficult to access loans and lines of credit, but it’s also harder to get approved to rent an apartment and, in some cases, qualify for a job.
For communities that already faced systemic discrimination, lower credit scores only make it harder to find financial success. Majority Black, Hispanic and Native American communities have at least 1.5 times the rates of subprime credit scores, debt in collections and high-cost non-bank borrowing (such as payday loans) compared to majority-white communities, according to data from the Urban Institute.
|Communities by race or ethnicity
|Median credit score
|Source: Urban Institute
When looking at these credit scores, it is important to acknowledge the historical and ongoing types of discrimination described above that have contributed to lower scores for non-white communities. So, although working on building positive financial habits is ultimately the only way to raise a credit score, many people of color face additional barriers beyond their control.
That said, even if your credit is less than ideal, knowing where you’re starting from can be helpful for your credit journey. Once you know your credit score, you can see where your score lands among the FICO scoring tiers.
Then, you can begin taking steps to build your credit. If you’re not sure where to start, or if you’re already managing debt, consider looking for a Financial Empowerment Center (FEC) in your area. FECs offer one-on-one financial counseling as a free public service. If there’s no FEC in your area, the NAACP offers free financial literacy materials that are geared toward Black communities but available to people of all backgrounds. You may also find it helpful to consider tips for first-generation credit card users.
While there are many organizations that claim to help people build better credit, not all of them are trustworthy. Even nonprofit credit counseling organizations can be predatory. If you decide to seek credit counseling to help build your credit score, take the time to ensure the counseling organization is accredited by the National Foundation for Credit Counseling. The organization should also provide free educational materials with no obligation from you to use their services.
Credit card ownership by race and ethnicity
The Equal Credit Opportunity Act may have explicitly prevented lenders from discriminating against applicants based on race, but credit disparities are still widespread among people of different races and ethnicities in America.
This data from the Federal Reserve shows the share of adults by race and ethnicity who own a credit card:
|Race or ethnicity
|Percentage of adults with a credit card
|Source: Federal Reserve
Why the disparity in these percentages? A number of factors may influence Black and Hispanic communities’ access to and utilization of credit, compared to other racial groups:
- People of color are more likely to be considered “credit invisible,” meaning they have no credit history at all. The latest data from the Consumer Financial Protection Bureau (CFPB) shows that about 26 million consumers (or 11 percent of American adults) are credit invisible. But about 15 percent of Black and Hispanic Americans are credit invisible, compared to 9 percent of white and Asian Americans.
- Black and Hispanic communities may distrust financial institutions. Underserved communities may have difficulty trusting financial institutions and their products. This is understandable, considering that 30 percent of Black Americans and 27 percent of Hispanic Americans report being either tricked or misinformed during their first interaction with a credit product, compared to white Americans (18 percent) and Asian Americans (15 percent).
- Black and Hispanic communities often have access to fewer financial services. The fact that Black and Hispanic households have higher unbanked and underbanked rates means they have less access to reputable financial products. Black and Hispanic individuals without a bank account may find it difficult to access other products, such as credit cards.
- Racial discrimination is still inherent in the lending process. The remnants of past racist systems still exist throughout many of our financial systems, including the credit scoring models used today. For example, those who have inherited generational wealth are often at an advantage when it comes to earning an excellent credit score, as they may have access to stronger financial organizations or greater familial assets. Families of color who have faced discrimination in housing, financial access and other areas may not have these privileges.
These trends are slowly evolving. In recent years, some credit bureaus have made it easier for people — especially those who are considered credit invisible — to start building a credit history with alternative data.
Alternative data may include your bank account information and cash flow, rental payment history and utility payments. Programs like Experian Boost and UltraFICO can help you incorporate this information into your credit file and potentially qualify for credit cards and loans to build your credit even more.
Credit card debt by race and ethnicity
When it comes to getting approved for credit, racial differences can change the odds of getting denied or approved for the amount requested. Black and Hispanic credit applicants are much more likely to report getting denied or receiving less credit than they initially requested from lenders, according to Federal Reserve data.
However, credit card balances are highest among white, non-Hispanic Americans and those identifying as “other,” the Federal Reserve Survey of Consumer Finances shows. Black (non-Hispanic) and Hispanic Americans, on the other hand, carry the lowest average balances.
|Race or ethnicity
|Average credit card debt
|Source: Federal Reserve
What’s more, white Americans are the most likely demographic to report holding credit card debt.
While 41 percent of Americans say they have credit card debt, according to a recent CreditCards.com survey, a slightly higher 43 percent of white Americans do. (Note: Like Bankrate, CreditCards.com is owned by Red Ventures.) Meanwhile, 41 percent of Black Americans and 39 percent of Hispanic Americans report having credit card debt.
|Race or ethnicity
|Percentage with credit card debt
|Source: CreditCards.com survey
The bottom line
Despite efforts to eliminate bias in the U.S. credit system, data indicates that race and ethnicity still impact which populations can access and build credit in America today. While alternate credit scoring programs and some nonprofit organizations are working to close racial wealth gaps and lessen inequalities, there’s still a long way to go.