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According to a new study from the Urban Institute, young adults from majority black and Hispanic communities tend to have lower average credit scores than those residing in majority white communities.
The research found that 25- to 29-year-olds in majority-Black communities have a median credit score of 582 — below the subprime threshold of 600. In comparison, 25-to-29-year-olds in majority-Hispanic communities had a score of median credit. of 644, while those in majority white communities had a median score of 687.
Additionally, young adults from predominantly Black and Hispanic communities are also more likely to see their credit rating decline as they age, according to the nonprofit research organization.
Between 2010 and 2021, 32.9% of 18-29 year olds in majority black communities saw their credit score drop, while 26.2% of those in majority Hispanic and only 21% of those in majority white communities saw their credit score drop. lower credit rating. .
The research is based on the Urban Institute’s analysis of consumer records from one of the three major credit bureaus. The precise source of the data was not disclosed.
Bad scores ‘can lead to cycles of debt’
These low scores have significant and lasting financial consequences.
“People with credit scores below that  are less likely to get credit at affordable rates,” said Thea Garon, senior policy program manager at the Urban Institute.
“They’re more likely to borrow high-cost credit, which can lead to cycles of debt and further erode their credit ratings,” she said.
Subprime lending options tend to be more visible in diverse underserved communities, noted Bruce McClary, senior vice president of memberships and communications at the National Foundation for Credit Counseling.
Residents of these areas who have income problems and do not have much job stability may turn to subprime financing with higher interest rates and high fees, which can hurt their credit score. “It’s kind of a recipe for disaster,” McClary said.
One such high-interest product, payday loans, has recently come under scrutiny for the cycles of high fees and debt associated with them.
Score disparity stems from discriminatory policies
Credit scores measure the likelihood of a borrower repaying their debt on time. Most credit scores range from 300 to 850. The higher the score, the better the interest rate a borrower can get on credit cards, as well as mortgages, autos and other loans.
Credit scores are determined by factors such as a borrower’s current outstanding debts, number and type of loans they have, length of time loans are open and available, bill payment history and the amount of credit used.
The reason black and Hispanic borrowers start behind on their credit scores has less to do with individual behavior and more with the limited financial resources of their family household, Garon said.
These households have less wealth to draw from previous generations because of lending policies that favored white borrowers, such as homeownership covenants that prevented blacks from living in majority white areas and redlining, whereby mortgage lenders restricted the customers they served.
“The disparities are rooted in decades of discriminatory policies that have systematically denied communities of color equal access to affordable financial services as well as opportunities to pass on wealth to future generations,” Garon said.
Closing the gap requires policy changes
For people who are trapped in a cycle of high-cost credit borrowing, it can be helpful to seek help from counselors or nonprofits, Garon said. Credit unions can also be a resource for consolidating loans at lower interest rates, making it easier to pay down debt balances.
Importantly, because credit scores are based on how well a person is honoring their financial obligations, they don’t necessarily need more ways to get their rating up.
“You can start small and still build a pretty decent credit score if you need to rebuild your credit or improve your credit to get to where you’re able to qualify for lower interest rates and loans that meet your needs,” McClary said.
But for the system to really change, policymakers will need to address the problem with proactive measures to ensure that lenders of all kinds make loans fairly and that the credit scoring system gives all borrowers a fighting chance. get affordable credit, Garon said.
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If rent payments were included in credit scores, for example, it might better reflect people’s ability to pay their obligations, she said.
Additionally, other policies could close the racial wealth gap, such as universal baby bonds, progressive childhood development accounts, tuition-free public universities, as well as student aid. buying a first home, Garon said.
Bank of America recently announced the launch of new mortgage products with no down payment and no closing costs for certain markets, including predominantly black and/or Hispanic/Latino neighborhoods in Charlotte, NC; Dallas; Detroit; Los Angeles; and Miami. Other financial institutions, including Citi, also offer programs to make their lending practices more inclusive.