Credit Reporting as a mechanism to address racial disparities and closing the racial wealth gapFeb 192021
A credit report seeks to provide an objective basis for determining someone’s eligibility for credit. An independent entity i.e. a credit bureau collects and discloses the credit information of an individual by way of a credit report. This credit information shows how they would have serviced their debts in the past to provide an unbiased gauge of their credit risk and therefore their likelihood of meeting the credit requirements in the request to be extended credit. This tool seeks to circumvent heavy reliance on personal interviews and other means in the evaluation of applications for credit by which subjective factors such as race and gender may come into play.
However, research in the United States is showing that within the very use of credit information there appears to, unfortunately, be a deep-rooted, underlying presence of discrimination stemming from the historical injustices and racial economic divide and disadvantage of those of African descent. Such has the potential to allow the issue of a general lack of financial access in the African American community to persist to this day thereby perpetuating the historical injustices and disadvantages suffered by those in that community.
Thus, in the American context, as they go back to review the history of credit information, they also take into account and incorporate the past historical disparities stemming from race and that lack of it by a racial group and thereby leading to the further restriction of it.
Research in the United States of America highlights that 1 in 3 Black households did not have enough credit information to generate a credit score (known as having a 'thin' credit file), while only 18% of White households had a thin file. With lower or a general lack of credit information such persons may have no choice but to access credit under extreme measures with higher interest rates and stricter terms thereby placing harder burdens in their access to finance and their ability to repay under such harsh stipulations.
A possible solution raised as part of the recent presidential campaign by the Democrats is the proposal of a new federally backed credit bureau premises of algorithms that included non-traditional sources of credit data such as rental history and utility bills. The use of such information may pave the way for those within the African American community to build a credit history and have credit information available to be in a better position to access finance through the traditional credit institutions.