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Establishing Credit History Harder in Low-income Areas

Consumers in lower-income parts of the country are more likely to establish credit history through negative means, like debt collection or public records, according to a recent study from the Consumer Financial Protection Bureau [1]. The study found that consumers in higher-income areas more commonly establish credit with a credit card or through co-borrowing.

According to CFPB Director Richard Cordray, the study shows that those in lower-income areas are at a financial disadvantage very early on.

“It is no secret that lower-income consumers face challenges in the financial marketplace,” Cordray said. “Today’s study shows that even at the beginning of their financial lives, they are faced with higher hurdles to gain access to credit, which hinders them from turning their version of the American dream into reality."

The study found that nearly 80 percent of Americans establish credit history before the age of 25, most commonly with credit cards. Consumers in higher-income parts of the country were 30 percent more likely to use credit cards to these means than those in lower-income areas. While 44 percent of high-income area consumers established credit through a card, just 34 percent of those in lower-income regions did.

Low-income area consumers are also 240 percent more likely to establish credit history through negative records. About 27 percent of these consumers establish their histories through what the CFPB calls “non-loans,” including debts in collection or public records. Only 7.9 percent of consumers in high-income areas establish credit via non-loans.

High-income area consumers are 100 percent more likely to rely on a co-borrower to establish credit history. Only about 15 percent of low-income area consumers establish credit through these means.

Additionally, the CFPB found that the percentage of consumers who establish credit history via student loans has doubled over the last decade. More than 26 percent of consumers now use student loans when establishing their credit history.

The CFPB estimates that 11 percent of all U.S. adults—about 26 million—are “credit invisible,” meaning they have no credit history with Experian, TransUnion, or Equifax. Without a history, these consumers are at a disadvantage when it comes to lending.

“Without a sufficient credit history, consumers face barriers to accessing credit or higher costs,” the CFPB reported. “This issue disproportionately impacts consumers who are African American or Hispanic, and people who live in low-income neighborhoods. It can also impact some recent immigrants, young people just getting started, and people who are recently widowed or divorced.”

Read the full report at ConsumerFinance.gov. [2]