| Entities | |
| Topics and Issues | Alternative Data (18) Credit scores (37) |
In February 2024, the National Consumer Law Center (NCLC) announced a report, Past Imperfect: How Credit Scores “Bake In” and Perpetuate Past Discrimination. The report is mostly a repackaging of old ideas in a new report. The report notes that “this racial wealth gap didn’t happen by accident. It was caused by centuries of discrimination, redlining.” The report notes that
Reducing the harm to Black and Latino communities from the racial disparities and history of discrimination baked into credit scores requires a multi-pronged approach, including:
-
- Stop the Mission Creep. Ban the use of credit information in rental housing and insurance. Severely restrict the use of credit history in employment.
- Restrict Risk-Based Pricing. With risk-based pricing, lenders charge higher rates to consumers with lower credit scores. Interest rates should not exceed 36% for small loans and lower for larger ones, as higher rates exacerbate racial injustices by placing borrowers in a debt trap that only worsens their economic situation.
- Expand Special Purpose Programs. These programs are specifically aimed at increasing access to credit for underserved communities, especially communities of color, and are explicitly permitted under the Equal Credit Opportunity Act.
- Reduce Time Limits on Negative Information. Another option is to reduce the time limits on negative information in credit reports to three years as a way to minimize the vicious cycle aspect of low credit scores.
- Develop Intentionally Improved Algorithms. A promising reform is the development of algorithms designed to reduce racial disparities. Scoring models and algorithms need to be refined and improved with an intentional focus on reducing racial disparities. The income disparities and wealth gaps reflected by credit scores were the product of centuries of intentional discrimination and cannot be reduced without the same level of intentionality.
- Create a Public Credit Registry. A public credit registry could develop credit scoring model that actively takes past and present discrimination into account and is intentionally designed to reduce racial disparities
Caution should be exercised in using alternative data as a reform, because it can also be extremely damaging to consumers. For example, unless it only uses positive data, rent payment reporting can create enormous harms for struggling renters. Alternative data will not eliminate racial disparities in credit scores, because any data that relies on financial information will still reflect racial disparities given the unequal economic positions of households of color and white households.