In the United States, you need a good credit score to buy a home, get a credit card, qualify for good insurance, and in some cases, to get a job or rent an apartment. However, since credit scores were first introduced in 1989, many studies have argued they’ve widened the wealth gap in the United States, particularly the racial wealth gap.
Back in July, Joe Biden announced a plan to establish a new federal credit bureau. The idea is just one proposal in a lengthy 110-page document jointly produced by the Biden campaign and Vermont Senator Bernie Sanders. The new agency would be housed within the larger Consumer Protection Financial Bureau.
To be clear, a new public credit bureau would not replace the current credit reporting agencies like TransUnion, Equifax, and Experian. However, federal lenders would be required to use the new federal bureau for loans that are backed by the U.S. government, including certain housing and student loans like Federal Housing Administration (FHA) mortgage loans and Parent Loan for Undergraduate Students (PLUS) loans.
How would a public credit bureau work?
The Biden campaign hasn’t released many details about how a proposed federal credit bureau would work. However, the bureau’s stated goal would be to “minimize racial disparities.” This could partially be achieved by broadening the data that feeds the credit score algorithm. The examples mentioned in the policy document include additional factors like rental history and utility bills.
Not much is known about how the Public Credit Reporting Agency (PCRA) would enforce this new system, but current law may provide insights. Two laws — the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA) — provide a blueprint for how the PCRA may function. The FCRA ensures credit reports are fair and accurate. This law includes mechanisms for consumers to dispute information in a report. The ECOA explicitly prohibits discrimination in lending and credit scoring based on factors like race, color, sex, marital status or age.
Based on Biden’s proposal, it seems likely that the ECOA could be amended or guidance could be issued within the new credit bureau that would take into account the less obvious forms of discrimination.
How do credit scores contribute to the wealth gap?
In a 2020 Brookings Institution report examining the racial wealth gap in the United States, the authors note that “the wealth gap reflects a society that has not and does not afford equality of opportunity to its citizens.” The authors include a number of sobering statistics, the most striking of which may be that the net worth of a typical white family in the U.S. is $171,000, while the net worth of a typical Black family is only $17,150.
Adem Selita, Co-founder and CEO of The Debt Relief Company, says formal and informal policies like Jim Crow and redlining made it difficult for people of color to establish credit and accumulate wealth.
“The data derived in the algorithm is based on the past, and the past is based on centuries of discrimination and financial exclusivity,” says Selita. “Due to this, the current credit models tend to contain future biases towards communities of color and other ethnic minorities. This can impact an individual’s life in many different ways, but most commonly, it will impact their ability to purchase a home or receive favorable lending terms,” he adds.
Too long, didn’t read?
In collaboration with Vermont Senator Bernie Sanders, the Biden campaign has announced a plan to create a federally backed credit bureau. Critics maintain that the current credit scoring systems ignore the impact polices like redlining have had on racial minorities in the United States. This new bureau would ostensibly seek to shrink the wealth gap by providing an alternative scoring system that uses a broader range of criteria to determine whether or not a person should be given a loan.
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