Why Credit Scores Have a Race Problem

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By Hannah Stephan

The last time you applied to rent an apartment, did you consent to a credit check? If so, you’re not alone—almost half of Illinois landlords say credit score is a top factor in their search for the “perfect” tenant. But is this practice actually effective at identifying tenants who are more likely to pay rent on time? The answer is likely no. Though credit checks have become routine, credit scores and credit history reports were not designed for non-lending purposes and are still not intended for that purpose to this day. Research has shown that credit is not the best predictor of a tenant’s ability to pay rent. According to the Center for Financial Services Innovation, there has been no analysis to date on whether rental payment behavior is predictive of credit risk. Other studies conducted by The Credit Builders’ Alliance and Experian show that when rental payments are included in the calculation of a credit score, the scores almost always increase. Currently, the calculation of a credit score uses only credit and loan payment history, credit usage, length of credit history, types of credit, and number of accounts.

Additionally, credit reports frequently contain errors. A Federal Trade Commission study found that as many as one in four consumers had errors in their credit report that negatively impacted their credit score. When landlords have a credit threshold denial policy, they can wrongly disqualify applicants who aren’t able protest or explain an incorrect credit record until after their application has been denied.

Communities of Color Are Significantly Impacted by Credit Score Screens

Credit score screens don’t just have an accuracy problem – they also produce racial disparities. This result stacks the deck against communities that are already vulnerable to housing instability for a variety of reasons including historical disinvestment and redlining, mass incarceration, and implicit bias.

Many studies, mostly at the national level, have shown stark disparities in credit scores among different racial groups. There has been limited research focused in Illinois and Chicago:

  • The Woodstock Institute found that predominantly Black communities in Illinois were four times as likely as White communities to have individuals in the lowest credit range (under 620 credit).

  • Andrew Rombach of LendEDU pulled and analyzed Chicago ZIP code-level data from Experian’s Premier Aggregated Credit Statistics (PACS) in 2017. PACS is a service offered by Experian where researchers or businesses can pre-define a set of criteria related to credit scores and Experian will send them the data for a fee. Here is a map of Chicago with credit health shaded by ZIP code (dark green is the highest credit, and red is the lowest):

Map of Chicago with credit health shaded by ZIP code. Dark green is the highest credit, and red is the lowest.

Map of Chicago with credit health shaded by ZIP code. Dark green is the highest credit, and red is the lowest.

The neighborhoods with the highest average credit scores are almost all on the North side of Chicago, while the neighborhoods with the lowest average scores are nearly all located on the South and West sides of the city and are historically under-invested neighborhoods in Chicago.

Credit health also appears to have a relationship with race. When race by ZIP code is examined, 9 out of the bottom 10 ZIP code areas have a Black population of over 90%.

There are several explanations for the racial gap in credit scores, including:

Income Gap

  • According to a 2017 report, the median income in Chicago is $70,960 for white populations, $30,303 for Black populations (134% lower), and $41,188 for Latinx populations (70% lower). This gap is worse than the national average, which is 70% lower for Black populations and 40% lower for Latinx populations.

Dual Credit Markets

  • Consumers that operate in non-traditional markets (such as peer-to-peer lending), who are often historically disenfranchised populations, typically have only negative financial behavior reported to credit bureaus and not positive financial behavior.

Credit History

  • 25% of all Black people in the U.S. and 20% of Latinx people are not scoreable by traditional credit models (also known as “credit invisible”) due to a lack of credit history.

  • The new UltraFICO score, which was created as a way to score individuals with little or no credit history, may help up to 10 to 15 million people who are currently credit invisible get a credit score and receive access to credit. This is an opt-in program that considers banking history and it may also help increase existing credit scores.

Among low-income populations that are served by Public Housing Authorities across the country, the story is often the same. For example, the Houston PHA encourages landlords to screen for credit when evaluating a Housing Choice Voucher holder. The U.S. Department of Housing and Urban Development (HUD) offers very little guidance on this issue, saying in its 2007 guide for subsidized multifamily housing programs (including Section 8 Project-Based Assistance and Rental Assistance Programs) only that “owners may reject an applicant for a poor credit history, but a lack of credit history is not sufficient grounds to reject an applicant.” The handbook also maintains that a credit check can be a good proxy to determine whether a tenant will pay rent in a timely manner. The Housing Choice Voucher handbook makes no mention of credit or credit screening.

How Can We Protect Renters?

The current practice of screening for credit in rental housing results in unfair outcomes for many people. Existing research supports the idea that credit scores should not be used to evaluate a prospective tenant’s ability to pay rent. The following are a few policies that could help reduce the disparity:

  • Implement a “ban the box” policy for credit: This year, the Cook County Board of Commissioners passed the Just Housing amendment restricting blanket bans on rental applicants based on criminal background. A similar policy for credit could prohibit housing providers from enforcing blanket credit score limits. Such a policy could prohibit landlords from having a minimum credit score that they would accept, or from denying someone housing based on their credit score without conducting an individualized assessment that takes multiple factors into account, such as positive rental history, employment or school history, or other factors.

  • Create HUD and CHA guidance for credit score screens: Since Housing Choice Voucher holders and other tenants in subsidized housing are only responsible for paying a portion of the total rent, a credit check is not a rational way to evaluate tenants’ ability to pay and often eliminates many people from consideration. HUD and the Chicago Housing Authority should consider creating guidance that recognizes the unjust disparities caused by such policies and discourages landlords from establishing a credit requirement or even performing a credit check at all in the case of subsidized tenants.

In Chicago and Illinois, systemic barriers continue to keep families from acquiring the secure and stable housing they need to thrive – particularly in low-income communities of color. Inaccurate and racially discriminatory credit scores should not continue to help drive the affordable housing crisis. 

Hannah Stephan is an AmeriCorps VISTA with Chicago Lawyers’ Committee for Civil Rights focusing on policy research and community outreach in fair housing. She will be attending the University of Minnesota Law School starting in Fall 2019.

Fair HousingTimna Axel