By Charlene Crowell
When it comes to consumer finance, traditional lenders usually review credit scores before reaching a decision. In general, the higher a consumer’s credit score is, the lower the cost of credit they will pay. Conversely, the lower one’s credit score, the higher the cost of credit and interest will likely be. Whether applying for a credit card, auto loan or a mortgage, bad credit histories make future credit and borrowing more expensive.
But according to a new report by the Consumer Financial Protection Bureau (CFPB), there are literally 45 million consumers – most of whom are either Black or Latino – who do not fall into traditional credit profiles. Beyond race and ethnicity, the affected consumers often live in low-income neighborhoods.
“When consumers do not have a credit report, or have too little information to have a credit score, the impact on their lives can be profound,” said CFPB Director Richard Cordray. “It can preclude them from accessing credit and taking advantage of certain opportunities.”
Cordray explained, “And given that we found that consumers in low-income neighborhoods are more likely to be credit invisible or unscored, this may be limiting opportunities for some of the most economically vulnerable consumers.”
CFPB found that one in 10 consumers – some 26 million people – are “credit invisible,” meaning they have no credit history with any of the three major nationwide credit-reporting companies. The Bureau’s analysis suggests that the differences across racial and ethnic groups occur in early adult lives and persist thereafter.
An additional 19 million consumers are “unscored,” with credit profiles either out-of-date or insufficient to be consistent with today’s commercially-available credit scoring model.
In comparing the credit experiences of consumers by race and ethnicity, CFPB found that 13 percent of Black consumers and 12 percent of Latino consumers are “unscored,” compared to only 7 percent of White consumers.
For the credit invisible, the incidences are higher. About 15 percent of Black and Latino consumers are in this credit group, compared to only 9 percent of Whites.
In other words, a significant number of consumers of color are living outside of the financial mainstream. Instead of having bank accounts or credit cards, these consumers are likely to use money orders, check cashing services, pre-paid debit cards and other costly alternative financial services that facilitate personal financial transactions while denying them the ability to build solid credit profiles.
While each credit reporting agency has its own criteria, typically consumers with comparatively high credit scores are able to secure the lowest lending rates and fees on financial services. According to FICO, recent credit activity connotes at least one account with activity over the last six months or longer. FICO scores can be as low as 300 or as high as 850.
For consumer advocates, access to credit continues to be a concern, especially when consumers of color are involved.
“The CFPB research suggests that alternative or enhanced credit reporting tools could ensure African-Americans and Latinos have more complete credit histories. The current system does not provide a complete picture of consumers in these growing communities – often forcing them to pay higher fees for financial services,” said Nikitra Bailey, executive vice-president with the Center for Responsible Lending. “This, in turn, leaves families and whole communities locked out of mainstream lending and ripe for abuse by predatory lenders.
“Just because a person or family lives in poverty, does not mean their only option should be a predatory lender. Access to credit can and should open doors of opportunity to a range of financial services that are fair, accessible, affordable and transparent for everyone.”