Q: Can Including Rent and Utility Payments in Credit Scores Reduce Racial Disparities in Lending?

Including rent and utility payments in credit reports and scoring models can increase credit scores, and reduce racial disparities in credit scores.

A: Yes!

The Problem

Historically, people of color have had limited access to safe, affordable credit. From the 1930s through the 1970s, discriminatory rating systems labeled communities of color “high risk” and those neighborhoods were “redlined” on real estate maps. Loans made to residents who lived in these communities—if they were made at all—were extremely expensive.

As a result, communities of color had to rely on fringe lenders, who only reported negative data to credit bureaus. This has led to a cycle of thin credit histories and subprime loans, which are harder to repay due to higher interest rates and faster repayment periods. Because of this, African Americans and Latinos were more likely to have poor payment histories, which affect credit scores.

How Rent and Utility Payments Could Help

Making consistent on-time rent and utility payments is predictive of positive credit behavior. However, this information is rarely factored into a person’s credit score by the models—even though delinquent payments are!

Including positive payment information in credit reports and scoring models can increase credit scores. In one pilot program, 79 percent of low-income renters whose rents were reported saw their VantageScore (a credit-score model that recognizes these kinds of payments) increase, and that increase averaged 23 points. Fifteen percent moved into a lower credit-score risk tier.

Inclusion of utility payments could reduce the number of borrowers considered to be subprime by half.

Because a majority of African Americans and Latinos are renters, this change could reduce racial disparities in credit scores as well. VantageScore estimates that mortgage lending to African Americans and Latinos could increase by 16 to 32 percent over 2013 levels if all credit scores included information on rent and utility payments.


The Answer is for you to use. Please distribute freely for noncommercial purposes as long as Shelterforce’s credit remains on it and you let us know how you used it by emailing [email protected].

What do you find yourself explaining over and over? Send suggestions for The Answer to [email protected].

 

OTHER ARTICLES IN THIS ISSUE

  • The fifth installment of Shelterforce's Health and Community Development supplement.

    Spring 2019 — Health and Community Development Supplement

    May 15, 2019

    In our fifth installment, we take a look at how organizations are taking health care investments in housing to the next level, and how cities can weather the effects of climate change by going beyond infrastructure to address institutional racism, historical inequities, and access to physical and mental health services.

  • From Sustainability to Resilience

    May 13, 2019

    My first reaction to the emergence of “resilience” as a lens for viewing community development was mostly informed by skepticism.

  • A child stands in front of a sign that reads "Low Water Landscape." Photo by 100 Resilient Cities

    Resilience 101

    May 13, 2019

    Community development fits well within the growing resilience movement—and connecting the two more explicitly could make their work even more powerful.