Exploring the Racial Disparity in Credit Scores: How Discrimination Can Affect Credit Opportunities and Financial Well-Being

Does the 18-year-old from Compton get the same line of credit as the kid from Beverly Hills?

Once upon a time, there was an 18-year-old from Compton named Juan. Juan had been working since he was 15 years old, and he had always been a responsible and hardworking young man. He had always paid his bills on time and had never gotten into any financial trouble.

One day, Juan decided to apply for a line of credit at his local bank. He had heard that it was a good way to build credit and that it could be useful in the future. Juan filled out the application and waited anxiously for a response.

Meanwhile, across town in Beverly Hills, there was another 18-year-old named James. James had never worked a day in his life, but he had a 700 credit score. James's parents were wealthy and had always taken care of his financial needs. James also decided to apply for a line of credit at the same bank as Juan.

When the bank reviewed the applications, they noticed that Juan had a lower credit score than James. Despite Juan's hard work and responsible behavior, the bank felt that James was a safer bet and approved his application for a line of credit.

Juan was disappointed when he found out that he had been denied. He couldn't understand why the bank would give James a line of credit when he had never even held a job, while Juan had been working hard for years.

Despite this setback, Juan didn't give up. He continued to work hard and pay his bills on time, and eventually, his credit score began to improve. After a few years, he applied for a line of credit again and this time, he was approved.

10 Key takeaways 

Rates of subprime credit scores in majority-Black, Hispanic, and Native American communities are at least 1.5 times higher than in majority-white communities

Credit scores are determined by credit bureaus based on data in credit reports, including information on credit products, collection accounts, and bankruptcies

Credit scoring companies, such as FICO and VantageScore, use proprietary algorithms to create scores between 300 and 850, with higher scores predicting lower credit risk

Black Americans may have a lack of credit history due to past discriminatory practices, such as redlining, which has resulted in lower homeownership rates and higher rates of credit invisibility

Lending discrimination can prevent qualified borrowers from accessing credit and building wealth through homeownership

Some ways to build and protect credit include using credit products responsibly, regularly checking credit reports, and considering alternative credit products

It is important to be aware of predatory lending practices and to report any instances of discrimination

A low credit score or no credit history can make borrowing difficult and expensive

If you can't access good credit products, you may struggle to build wealth

Race is not considered in credit scores, but discrimination can still impact credit opportunities and financial well-being.

There is a significant racial disparity in credit scores, with rates of subprime credit scores in majority-Black, Hispanic, and Native American communities being at least 1.5 times higher than in majority-white communities. Credit scores are determined by credit bureaus based on data in credit reports, including information on credit products, collection accounts, and bankruptcies. Credit scoring companies, such as FICO and VantageScore, use proprietary algorithms to create scores between 300 and 850, with higher scores predicting lower credit risk. However, Black Americans may have a lack of credit history due to past discriminatory practices, such as redlining, which has resulted in lower homeownership rates and higher rates of credit invisibility (having no credit history or report at any of the three bureaus). Lending discrimination can also prevent qualified borrowers from accessing credit and building wealth through homeownership. Some ways to build and protect credit include using credit products responsibly, regularly checking credit reports, and considering alternative credit products, such as secured credit cards or credit-builder loans. It is also important to be aware of predatory lending practices and to report any instances of discrimination.