June 7, 2017

CFPB: Study Finds Consumers in Lower-Income Areas are More Likely to Become Credit Visible Due to Negative Records

Consumers In Higher-Income Areas More Likely Than Those in Lower-Income Areas to Establish Credit with a Credit Card or Co-Borrower

WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) today released a study on the transition to credit visibility that found that the way consumers establish credit history can differ greatly based on economic background. Consumers in lower-income areas are more likely than those in higher-income areas to become credit visible due to negative records such as a debt in collection. Consumers in higher-income areas are more likely than those in lower-income areas to establish credit history by using a credit card or relying on someone else.  The study also found that the percentage of consumers transitioning to credit visibility due to student loans more than doubled in the last 10 years.

“It is no secret that lower-income consumers face challenges in the financial marketplace,” said CFPB Director Richard Cordray. “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.”

In 2015, CFPB estimated that 11 percent of adults in the United States, or about 26 million people, are credit invisible with no credit history at one of the three nationwide credit reporting companies. Traditionally, a credit history reflects whether payments are made on time, what debt a consumer owes, and whether they have a debt or bill in collection. Lenders use a consumer’s credit history to decide whether to extend credit and how much the credit will cost. Without a sufficient credit history, consumers face barriers to accessing credit or higher costs. 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.

Today’s study looked at how consumers first establish credit history by reviewing de-identified credit records of more than one million consumers who became credit visible. It examined when consumers transition out of credit invisibility and the means by which they do so. The study found that almost 80 percent of transitions occur before age 25 and that credit cards are the most common way consumers establish credit. The study also found that the way consumers establish credit history – taking out a credit card, relying on a co-borrower, or having negative records – can differ greatly based on economic background. Specific findings in today’s report include:

Today’s report on credit invisibility is available at: https://www.consumerfinance.gov/data-research/research-reports/cfpb-data-point-becoming-credit-visible/

This post was originally published here.