Unsurprisingly, racist data leads to racist outcomes. It has striking effects on people’s life chances.” By using this data we’re amplifying those inequalities today. “It’s a mirror of inequalities from the past. “The data used in current credit scoring models are not neutral,” Frederick Wherry, a Princeton sociologist who studies financial racism, tells Forbes. Notably, most credit scoring agencies don’t factor in payments for phone bills, utilities or rent, which are broadly used across under-resourced communities and good indicators of whether a borrower can consistently pay their bills. Auto loans, too, disproportionately impact Black folks’ credit scores because many dealers charge them more for cars and place higher interest rates on their accounts. Since the majority of credit score calculations are based on payment history and credit use, unstable income can quickly tank a credit score. As a result of this history and many other factors, the Black homeownership rate is just 44%, compared to 74% for non-Latinx white people.Įmployment discrimination has kept the same communities economically precarious even today, about half of Black Americans live paycheck-to-paycheck. Although it was officially outlawed by the 1968 Fair Housing Act, it continued informally, more recently in the form of subprime lending. Credit reporting agencies began calculating number scores in 1989, using a formula created in 1959 by two white men that’s now known as FICO.īut the financial activity that credit agencies use in scoring - mortgages, student loans, car loans and credit cards - is inherently biased against BIPOC borrowers, because it’s based on financial instruments that economic racism has kept out of the reach of racialized communities for decades.įor most of the 20th century, redlining kept applicants of color, particularly Black folks, from getting mortgages and building wealth through home equity.

The passage of the ECOA mandated that banks use credit history, not any part of an applicant’s identity, in deciding whether to approve a loan. Prior to the 1974 Equal Credit Opportunity Act (ECOA), overwhelmingly white, male bankers had total discretion over business loan approvals and regularly denied BIPOC applicants based solely on their race. Rather than leveling the playing field, credit scores serve as gatekeepers to wealth-building for communities already facing the highest barriers.ĭespite creating inequity, this system is still an improvement on what came before. But the U.S.’s history of economic racism puts BIPOC people at a disadvantage in credit score calculations, codifying discrimination into data and producing more discrimination as a result. This system is supposed to be a neutral, fact-based way to decide whether to approve a loan application. This system ranks a person’s financial history on a scale of 300 (poor) to 850 (excellent), a number that plays a major role in whether a business owner can get the capital they need. Loans are the bedrock of starting or growing a business, and to get one, a borrower needs a good credit score. If there’s one thing every business owner needs, it’s financing.

Credit economix