After decades of unchecked influence creep, credit scores–a pseudo-scientific amalgam of risk factors calculated by a handful of private companies–now impact virtually every aspect of modern life, often for the worst.
This opaque, three-digit scale was conceived as a race-neutral, data-driven measurement of a person’s creditworthiness. Today, it’s the financial fingerprint used by lenders to assess the risk of default, by employers to evaluate the reliability of job applicants, by landlords to screen tenants, and by insurers and utilities to set rates. Your credit score is the shadow you never asked for and can’t outrun.
However, the algorithms (and the underlying data that feed them) have been corrupted by generations of systemic oppression and financial exclusion of people of color. Instead of removing race from lending, credit scores have become a direct proxy for it.
Sixty years after federal law barred lenders from denying credit based on a person’s race or where they live, America’s homeownership gap remains virtually untouched. Why? Our broken credit scoring system excludes and punishes people of color.
Credit scores range from 300 (poor) to 850 (excellent), with 54% of Black consumers reporting having a poor or fair credit score of 620 points or less. In contrast, only 37% of white Americans reported the same sub-optimal scoring in a 2021 survey. At the same time, an additional 21 million Americans have no credit history with any national reporting agencies. According to a recent Consumer Financial Protection Bureau report, these “credit invisibles” are predominantly Black and Hispanic consumers living in low-income neighborhoods where mainstream financial services are few and far between.
The cost of poor or nonexistent credit has far-reaching implications. Beyond the obvious denial of credit for home, auto, and small business loans, consumers with poor credit say their score has affected everything from their mental health and personal relationships to the ability to communicate well.
In a 2020 consumer survey, roughly a quarter of respondents with poor credit said their score hurt them in life either a little or a lot. Of those with poor credit, an overwhelming 79% said it has negatively affected their mental health, with 46% reporting feelings of shame and another 30% reporting anger.
Incumbent commercial lenders have no reason to change the status quo because it serves their bottom line. Owing to the enormous knock-on consequences of historical racism, Black consumers are at once underserved and overcharged by mainstream financial services. 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.
A 2019 study of nearly 7 million 30-year mortgages by the University of California at Berkeley found that Black and brown borrowers were charged higher rates, at an average of almost 0.08%, and steeper refinancing fees than whites. The study found that borrowers of color were offered higher rates when applying in-person and online. Despite the law, government regulators in 2013 caught one now-dissolved Maryland bank charging Black and Latino mortgage applicants millions of dollars in higher rates for no other reason than race.
Credit scoring just doesn’t add up. These three digits–and our continued endorsement of the status quo–are all that stand between tens of millions of Black and brown families from participating in the American dream. There is no reason to believe a home mortgage applicant with a demonstrated record of paying their rent on time won’t exercise the same diligence when paying down a mortgage at the same price point.
As the country erupted in protests and anger in the wake of George Floyd’s murder, corporate America acknowledged it could no longer stay quiet in the fight for true racial justice. Many pledged millions of dollars to economic equity initiatives while others started banking Black. One of the easiest and most potent levers corporate America can pull is to abandon the junk science of credit scoring. This critical action would be a powerful step in untangling and dismantling what Dr. Martin Luther King, Jr. described as the inseparable twins of racial injustice and economic injustice.
The Reverend Doctor Bernice A. King is a lawyer, a certified mediator in the state of Georgia, an ordained minister, and the youngest child of civil and human rights leaders Dr. Martin Luther King Jr. and Coretta Scott King. She serves as CEO of The King Center and chairs Ready Life’s Advisory Council.
Ashley Bell is a corporate lawyer, former Small Business Administration executive, and the CEO of Black-owned fintech platform Ready Life.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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