It’s a social problem, not a rating problem


Any lender worth its salt doesn’t care about race, religion, national origin, sexual orientation or marital status. Credit is a business based on managing credit risk, and bias in credit is not only bad business, but also illegal and subject to panoply of regulations. Where do credit scores come from?

Credit card loan equity

The Equal Credit Opportunity Act, which first passed Congress in 1974, when revolving credit card debt was $11 billion in the United States, now oversees over $1 trillion. Special thanks to Gerald Ford for this standard.

Some unfair lending practices date back to segregation when certain neighborhoods were “marked” to help Federal Housing Administration contain the risk. The course was a dark side of American history, and efforts were at least partially successful in banning the practice, although problems continue to exist.

It is rare to see bias in credit card underwriting due to the clinical nature of credit scoring. The dominant credit score, known as the FICO score, bases its calculation on factual data provided by lenders, such as account opening, amount, line usage, and credit age. No personal life information is part of the equation.

US News and World Reports published an article today on How Race Affects Your Credit Score, and one conclusion was not that there is an inherent bias in credit scoring, but that they are different social issues that cause a big divide between groups. The story cites data from the Urban Institute, illustrating the credit scoring disparities found in the Vantage Score. While all Americans average just over seven hundred, Caucasians top the pattern, Hispanics trail, African Americans have a deep gap, and Native Americans are at the bottom of the list.

The article quotes a former executive of FICO, the major credit reporting company: “‘Race is never on the report and is not factored into a score,'” he says. Nor is it your address or a zip code where racial diversity is different.”

Is the credit rating gap or company issues?

US News mentions:

  • The difference between “the average wealth of a white family and that of a colored family is huge,” Ortega says. “That alone has an impact on credit scores. If you have a higher income, you are more likely to pay your bills on time and you are offered credit limits.”
  • The median income in 2020 for black households was $45,870, compared to $55,321 for Hispanics, $74,912 for whites and $94,903 for Asian families, according to the United States Census Bureau.
  • Regardless of post-graduation income, black households have more student debt, which can hurt their creditworthiness, reports the Brookings Institution. Student loans can be problematic for credit scores, Ortega says.
  • According to a 2022 report from the Education Data Initiative.
  • Credit misinformation can also harm communities of color, Ortega says. The meaning is that “all credit is bad,” she says, leading to avoidance of traditional credit products.
  • Certain types of credit favored by (African American) borrowers, such as payday loans, are not taken into account in credit ratings. According to a Brookings Institution Analysis.

Does a new “inclusion” score make sense? Not if the goal is to assess risk among a wide range of people. Stick to the facts, we say. And the facts are the ability and intention to repay the credit. There are broader social issues to fix, but not to replace safe and sound lending responsibilities. The issue here is not credit scoring, but creating opportunities for inclusion and balancing long-standing issues around income distribution and opportunity for all.

Preview by Brian RileyDirector, Credit Advisory Services at Groupe Conseil Mercator


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