The voices of Urban Institute's researchers and staff
November 20, 2017

Credit scores perpetuate racial disparities, even in America’s most prosperous cities

November 20, 2017

Credit scores can perpetuate racial disparities in wealth and financial security, which affect not only people who are struggling financially but the cities in which they live. As we’ve found, residents’ financial health is closely intertwined with cities’ financial health.

A new Urban Institute interactive dashboard provides a snapshot of the financial health of 60 major US cities. The Financial Health of Residents dashboard uses various data to group cities with common characteristics into peer groups, like economically stable cities with high housing costs (e.g., San Francisco) and cities in economic recovery (e.g., Detroit).

Among all the data included in the dashboard, credit score data reveal how racial disparities persist in cities across the economic spectrum from prosperous to struggling:

  • Thirty-eight of the 60 cities have differences in median credit scores of 100 points or more between predominantly white and nonwhite areas. Nationally, the difference in median credit scores is nearly 80 points (697 versus 621, respectively), which, for a conventional mortgage, can cost families an additional $100 or more a month and thousands of dollars over the life of the loan.
  • Predominantly nonwhite areas in more than 50 of the 60 cities have below-prime median credit scores (660 or lower), and most of these are subprime (600 or lower).
  • Conversely, predominantly white areas in only 4 of the 60 cities have below-prime median credit scores.

Why do credit scores matter?

Credit scores are more than a measure of an individual’s fiscal health. They can make it easier for financially stable people to succeed and can prevent financially struggling people from gaining traction in the economy. Credit scores can determine an individual’s financial security from several angles. Credit scores can affect

  • the ability to pursue opportunity through a home or business loan;
  • the ability to absorb a financial shock, like getting a credit card to pay for an unexpected car repair;
  • the price of credit, which affects the amount a borrower ends up repaying;
  • the cost of insurance; and
  • success securing an apartment.

The credit score disparity between predominantly white and nonwhite areas might be a contributing factor to worsening wealth inequality. In 1963, the average wealth of white families was $121,000 higher than the average wealth of nonwhite families. By 2016, the average wealth of white families was more than $700,000 higher than that of black and Hispanic families.

Four strategies could help solve this problem

Cities can employ policies to help create an equal playing field and help more people gain a foothold and contribute to the local economy.

1. Assess city debt collection practices and provide constructive options for families to repay city debts, such as city-owned utility debts and city-imposed fines or fees. This can help cities boost city and residents’ financial health.

Reforming policies for city-levied fees and fines, as some cities are doing, could particularly benefit families of color, who are disproportionately harmed by fees and fines that can negatively affect their credit scores.

2. Assess city employment practices and take steps to boost city employees’ financial security. Forgoing credit checks in the hiring process could be especially beneficial to prospective employees who are struggling financially, particularly those of color.

Establishing a partnership with a financial institution to provide small-dollar emergency loans to city employees, along with safe products that make it easy for employees to save, can also enhance employees’ financial security and improve their credit scores as they repay the loan. In this way, the city can set an example for local employers to implement similar strategies to boost employees’ and residents’ financial health.

3. Protect consumers from unfair, deceptive, or abusive business practices by enforcing municipal consumer protection regulations, collecting consumer complaints, and educating businesses and consumers.

4. Create financial inclusion programs that support more financially vulnerable residents. Cites across the country have developed financial inclusion programs that provide free tax assistance, teach financial education, help residents save for a home purchase, and encourage access to available, but unused benefits.

More cities are embedding these efforts into their government infrastructure and dedicating offices and departments to financial inclusion. Boston, Denver, Lansing, New York City, San Antonio, San Francisco, and St. Louis have created Offices of Financial Empowerment to reduce financial disparities among residents. In other cities, nonprofits and banks sponsor efforts to meet residents’ needs through alternative banking models or providing flexibility in paying utility bills.

This new dashboard provides insight into which cities have more prosperous residents and which cities have more financially challenged residents. The relationship between race, location, and credit scores is not well studied, particularly for renting households, and we need more research and more work that develops targeted solutions. All US cities should create an environment where residents can quickly recovery from financial hardship and where prosperity doesn’t leave some residents behind.

Photo by Klaus Vedfelt/Getty Images.


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