Residents in predominantly minority communities in Illinois have lower credit scores on average than those in mostly white neighborhoods — and that is a significant contributor to the racial wealth gap, according to a recent report from the Illinois Asset Building Group and the Social IMPACT Research Center at the Heartland Alliance, a Midwest anti-poverty organization.
The credit score gap between white and minority communities fuels racial inequality in the state, the "Trapped by Credit" report concludes.
In general, the report found that communities of color in Illinois are less likely than mostly white neighborhoods to have well-being indicators associated with stronger credit scores, such as higher levels of educational attainment and greater rates of homeownership and employment.
Similarly, communities of color have on average lower levels of "good debt" from student or home loans and higher levels of "bad debt" from sources like credit cards.
Since good credit scores help people gain access to better jobs, homeownership and higher education, "a cycle emerges where low credit scores feed decreased financial and social opportunity, which in turn feeds low credit scores," the report reads.
Lindy Carrow of the Social IMPACT Research Center put it another way.
“Without good credit, you often can’t access those things, so disparities in credit scores are feeding the continued growth of the racial wealth gap,” Carrow said.
In Illinois, the median household income among whites is nearly twice that of African Americans, and "Latino households also have significantly less than their white counterparts," according to the report. At the national level, the median household wealth among whites is 20 times greater than African Americans and 18 times greater than Latinos.
As a case study, the report specifically highlighted the credit score gap and other disparities between two Chicago neighborhoods — Englewood on the South Side and Lincoln Park on the North Side.
Englewood's population is 99 percent minority, while the minority population in Lincoln Park is just 17 percent. The average credit score in Englewood is 603, which is 131 points less than the average score in Lincoln Park.
Postsecondary education, which helps an individual build credit and wealth, is not as easily accessible in Englewood than it is in Lincoln Park, the report found. In Englewood, just 7 percent of people age 25 and older have a bachelor’s degree or higher, compared with 82 percent of those in Lincoln Park.
The researcher also found stark differences in credit scores as well as homeownership and unemployment rates in two Metro East communities. In the village of Washington Park, where the population is 98 percent minority, the average credit score is 600. That's 107 points lower than the average credit score in nearby Belleville, Illinois, where only 22 percent of the population is minority.
In Washington Park, the homeownership rate is 46 percent, compared to 77 percent in Belleville. Meanwhile, Washington Park has an unemployment rate of 26 percent and 25 percent of households earn low incomes. By comparison, Belleville has an unemployment rate of just 6 percent and only 12 percent of households are low-income.
"Communities of color likely have lower average credit scores because of the same barriers that contribute to higher poverty rates in those communities: lower investment in schools, fewer jobs within the communities, and a lack of affordable housing," the report states. "In turn, low credit scores then serve as barriers to those same opportunities — bad credit histories and poor credit scores make obtaining loans for education and a home more difficult and expensive and can prevent someone from getting a job."
But there are ways to break this cycle of poor credit, said Lucy Mullany with the Illinois Asset Building Group, a statewide coalition focused on strengthening communities through increased asset protection and ownership.
"Policymakers need to invest in credit building programs, protect consumers from dangerous financial products and expand access to savings opportunities,” she said.
Other state-level policy suggestions include boosting the minimum wage, strengthening predatory lending reforms and creating a universal children's savings account program. Also, Illinois officials need to do a better job of enforcing a state law that prohibits employers from checking a job applicant's credit report, unless the position involves managing money.
And at the federal level, lawmakers should work to expand opportunities for positive credit reporting so that credit reports and scores reflect on-time utility, rental and telecom payments.
“Government policies and institutional practices created the racial wealth and credit gaps, and policies and practices can reverse it," Mullany stressed.