Credit Scores and The Status Quo
New Mexico’s credit economy is of great concern—our economy can not thrive if the majority of our families remain in a cycle of poverty. Credit scores play a big contributing part.
These days, a credit score is as important a number as money in the bank. This three-digit score determines our ability to get credit cards, mortgages, or car loans. It determines interest rates and time frames for repayment. It makes it possible to do things like start a business or go to college. And the system is far from equitable—in fact, the credit score has a big hand in perpetuating intergenerational poverty and class immobility. For those with bad credit or no credit, exiting that cycle can take years.
Access to credit is crucial in our financial system—not just for large purchases like a house or a car. Increasingly, especially for low-income families, credit is necessary for buying everyday things like food and clothes. But not everyone has the same ability to borrow, which means that not everyone has the same opportunities that credit affords.
In working with the City Alive capital table, we have been identifying gaps in the capital system in Albuquerque. Some of our city’s major financial institutions like Wells Fargo, Southwest Capital Bank and Nusenda Credit Union, have been putting heads together through City Alive to identify new ways of working that address systemic barriers to entry into the mainstream financial system. The credit score is one of the topics we revisit time and time again.
People with a higher credit score (in the 600-850 range) are more likely to get a good interest rate on a loan, while people with a lower credit score (300-500)—or those who don’t have a credit score—might not be able to get a loan at all. Even if people with poor credit are able to get a loan, they’ll spend more money and more time paying it off than someone with better credit.
The disadvantages don’t stop there. Someone with a low credit score in New Mexico pays higher rates for insurance, nearly 30% more on average for car insurance and 127% more for home insurance than someone with a high credit score.
Only 34.5% of New Mexico’s credit economy has what could be considered a “good” credit score—compared to the national average of 40.8%. We also have a higher than average percentage of the population with no credit score at all—12.7%, as opposed to the national average of 10.5%. Research out of Nusenda Credit Union has shown that this is, in large part, due to the high population of immigrant families, who often avoid the formal financial system out of distrust or unfamiliarity. It also has to do with the fact that Hispanic households, which make up 48% of our population, use significantly less of the mainstream credit system than white households.
Although there is legislation in the US to prevent credit agencies from discriminating based on factors like race, gender, and disability status, the credit score bakes those in. A post by the Communities Count blog makes a part of this legacy of discrimination clear:
“[U]ntil 2010 the basic FICO [Fair Isaac Corporation; the company that creates the most widely used creditworthiness score] formula counted mortgage payments but generally not rental payments. Whites are almost twice as likely as Blacks to own homes (and make mortgage payments), in part due to decades of federal mortgage and housing policies that explicitly made it difficult for people of color to buy homes.”
When capital from traditional lenders is not within reach, low-income people and people of color often turn to payday lenders. These payday loans, which are highly targeted towards low income communities of color, come with soaring interest rates, short payback terms, and no consumer protection. And they’re much more easily accessible than traditional loans: According to a report from the Santa Fe New Mexican from 2017, there are more payday lenders than fast food restaurants in the state of New Mexico. And because people with low credit are typically low income as well, they’re often unable to pay back their high-interest loans, getting trapped in a compounded cycle of debt.
In a state that is proudly diverse, lending inequities, especially those that disproportionately affect communities of color, are alarming. Our whole state suffers when low-income people and communities of color are boxed out from opportunities to access resources that can help them not only make ends meet, but reach financial stability.
A credit score is just one number, and by focusing on it exclusively to determine a person’s creditworthiness, we miss out on the rest of their story.
From low-income students, to immigrant communities, people of color, and other borrowers who face structural barriers to upward economic mobility we need to identify ways to make capital radically more equitable. Every New Mexican should have a seat at the economic table. To make that a reality we must revisit old systems and take a closer look at historically neglected data to extend sustainable interest rates and better terms to those who need the capital the most.
CONNECT THE DOTS:
City Alive's Capital Access action team meets monthly to problem solve and find ways for financial institutions to better support homegrown businesses through systems change and new programs. Co-op Capital is a key program partners collaborate on.
