Where Credit is Due: How Building Credit Builds Financial Security
The first credit reporting agencies came into being in the 1950s and 1960s as a way of helping banks and retailers assess a consumer's creditworthiness. Since that time, credit reports and credit scores have expanded in importance. A change in credit score can have significant impacts on the terms of a mortgage, and the details of a consumer's credit history can serve as a gateway to everything from employment to health insurance.
Access to credit is an important asset-building tool. The ability to borrow money under reasonable terms allows households to weather instability and support long-term savings. Having access to credit also eases access to important pillars of wealth-building, like buying a home or starting a business. In this way, access to credit is, in itself, an asset. However, millions of Americans are either left out of the traditional credit reporting system or are blocked from financial and personal opportunity because of poor or erroneous credit.
We recently released a new fact file about credit reports and credit scores and their impact on wealth-building opportunities for low- and moderate-income consumers. Here are some highlights:
- Nearly one in five consumers is "credit invisible" or has no credit score. Either because of a lack of credit history or a thin credit file, 45 million Americans have no credit score.
- Most Americans have less-than-stellar credit. Over half of consumers that do have a credit score have "subprime" scores, which can result in higher costs for loans and more difficulty weathering income volatility.
- The difference between having good and poor credit can be staggering. Compared to a typical subprime score, having a prime credit score can save you more than $32,000 over the course of a 30-year mortgage. Imagine having $1,000 more in your pocket every year after buying a home, and you can see how much of a difference good credit can make for the average low- or moderate-income family.
- Poor or missing credit disproportionately harms households of color. Black and Hispanic individuals report higher rates of subprime credit and are significantly more likely to be credit invisible. Much of this is the result of discriminatory lending practices that pushed subprime loan products onto communities of color.
- Credit reports are used for non-lending purposes like employment, health insurance and more. Despite the fact that credit reports were never designed to assess anything besides one's ability to repay a loan, credit histories are regularly scrutinized by employers, despite the fact that in most cases, credit history has no bearing on job performance. So far, only eleven states have banned credit checks for employment.
- Many low-income people who pay their obligations on time aren't given the credit they deserve. For millions of Americans, the most consistent payments they make are monthly rent and utility bills. But for most of the history of credit reporting, this kind of recurring payment wasn't captured by credit bureaus. Even responsible folks who have paid these obligations on time their whole lives can still have poor or missing credit. When negative events are reported (like collections and delinquencies) but positive and responsible behavior isn't, a person's credit history can unfairly paint them as financially irresponsible, despite steps they may have taken to prove otherwise.
The credit reporting industry is catching up to some of these trends. For example, many of the "big three" credit bureaus are developing alternative scoring mechanisms that will help bring previously unscored or low-credit people into the fold. However, more can be done to prevent credit reports from becoming barriers to non-lending opportunities like employment. To learn more about these opportunities, download our new fact file today.