How some in Detroit neighborhoods are left without credit scores

By: By Susan Tompor, Detroit Free Press
Date: December 17, 2021


Does how much money someone makes stop them from getting a desirable credit score? Or their race and ethnicity?

The answers: No, absolutely not. Some consumers think just the opposite, but your income and race or ethnicity are not used to calculate your personal credit score and do not boost or ding your score.

Yet some social and economic factors can impact whether you get a score in the first place. And many consumers who aren't able to be scored tend to live in the same area.

Unfortunately, factors, such as income and home ownership, can leave consumers without a traditional credit score — which can fuel a cycle of financial stress.

"The vast majority of banks won't lend if a consumer doesn't have a credit score," said Silvio Tavares, the new CEO and president of Stamford-based VantageScore Solutions, a competing credit-scoring system created in 2006 by the three major credit reporting agencies.

VantageScore released an extensive bit of research that examined the tens of millions of consumers who do not meet the minimum scoring criteria required to receive a credit score from conventional credit-scoring models.

Silvio Tavares, the new CEO and president of Stamford-based VantageScore Solutions, said banks and credit unions are able to use more inclusive credit scoring methods to create greater access to credit for historically marginalized communities.

The data highlighted some disturbing trends in some neighborhoods in Detroit and elsewhere — and gives more insight into financial inequalities.

Consumers without a score face far greater hurdles to getting credit, according to a 2016 report by the Consumer Financial Protection Bureau. They can end up paying far higher interest rates for car loans, credit cards and personal loans. And some are driven to rely on predatory lending products.

In general, the federal consumer watchdog agency noted that credit invisible consumers tend to be concentrated in areas of high poverty.

As many as 1 in 3 adults in Detroit — and as many as 1 in 5 in the United States — do not get a traditional credit score but could receive a score with new approaches, according to new research by VantageScore.

Nearly 44% of consumers in the lower-income areas in northeast Detroit and about 39% of consumers in southwest Detroit end up essentially ignored by conventional models but can be scored with VantageScore models, according to VantageScore.

As banks and credit unions look to create greater access to credit for historically marginalized communities, Tavares told the Free Press, it's increasingly important to see that lenders are able to go beyond just reviewing a traditional credit score.

Banks and credit unions look to create greater access to credit for historically marginalized communities and address how some consumers aren't able to receive traditional credit scores.

Tavares said a more inclusive credit scoring model, such as VantageScore 4.0, can help these consumers receive a predictive credit score, gain access to credit and ultimately find more economic opportunity.

In Michigan,15.6% of consumers face such challenges and would be able to be scored using the VantageScore 4.0 model, which became available in late 2017.

The challenges are even more significant in other states, such as West Virginia where 20.4% of adult consumers are ignored by conventional scoring models but able to be scored by VantageScore; Arkansas, where it's 19.1%; Louisiana, where it's 18.6%, and Kentucky, where it's 18.4%.

Breaking down that data by neighborhoods — or Public Use Microdata Areas as defined by the U.S. census — can be more telling.

Three of the top 10 areas in the country that face credit-scoring difficulties and would benefit from the VantageScore model are in Detroit — northeast Detroit, southwest Detroit and south central-southeast Detroit. A fourth community in Michigan — in the Flint area — is in that top 10.

The No. 1 ranking on the top 50 list goes to northeast Detroit, where the average income is $34,220 and 51.13% of the people living there are renters.

Income has the strongest correlation with someone's ability to receive a credit score. And Black consumers can be at a particular disadvantage because they tend to have lower income levels than other populations, according to VantageScore.

If you live in a neighborhood where household incomes are less than $50,000 a year, the report noted, you have less than a 50% chance of obtaining a credit score with conventional models when compared with consumers who live in communities where household income levels are more than $90,000.

In order to generate a score, it's important to know that conventional models require at least one account open and reported to the credit bureaus for six months or more; and at least one account that has been reported to a credit bureau within the past six months.

Consumers living in areas with a high level of renters — and areas with more limited access to bank branches — have lower odds of obtaining a score with a conventional model, according to VantageScore, even after controlling for other factors.

Tavares said 37 million more consumers are now able to obtain credit scores using the latest scoring model from VantageScore. That includes 10.7 million Black and Hispanic consumers who are hurt by conventional credit-scoring systems.

The report noted that 3.2 million Black and Hispanic consumers who would be able to receive credit scores under more inclusive models would obtain scores that are 620 or higher using VantageScore 4.0.

In some urban areas, according to VantageScore, up to 30% of consumers who don't have credit scores now would be able to receive a predictive score using the latest more inclusive models.

In metro Detroit, slightly more than 222,500 people who don't have credit scores would benefit by new more inclusive scoring methods, according to VantageScore.

If someone isn't sure if they can easily obtain credit, Tavares said, it can help to look for banks and financial technology apps that use VantageScore to increase their ability to get a loan.

Tavares noted that Fannie Mae and Freddie Mac use FICO scores when underwriting mortgages but efforts are underway to try to expand use to VantageScores, as well.

The VantageScore 4.0 issues scores in a range of from a low of 300 to 850 with scores in the 661 to 780 range considered good and those higher considered excellent.

Financial technology companies are playing a role in providing banking services and loans for those who are under served.

For example, MoCaFi — short for Mobility Capital Finance — is an online bank that is working with customers to give ways to report rent payments to Equifax and TransUnion as a way to boost their credit score with positive payment history.

Back in 2019, Experian brought actor and activist Hill Harper to the Roasting Plant coffee shop in Detroit to launch a marketing effort for its Experian Boost product, where consumers grant permission for Experian Boost to connect to their online bank accounts to identify and access some payment history.

File photo: Actor Hill Harper (center) is filmed talking about credit scores as part of a new program called Experian Boost at the Roasting Plant Coffee in downtown Detroit on May 1, 2019.

Others recognize that more needs to be done to go beyond legacy systems that cut too many people out.

Nat Hoopes, vice president and head of public policy and regulatory affairs at Upstart, said lenders are showing increasing willingness not to be prisoners to FICO scores and recognizing that many consumers who do not have credit histories are indeed creditworthy.

"People who have this limited credit history can end up looking riskier than they are," Hoopes said.

Other data, such as education and employment, can be factors that can help predict someone's ability to repay, he said.

Steps consumers can take

While it's important to understand how the system can go against you, it's also essential that consumers do what they can to build and keep strong credit.

Know what's on your credit report. Get your credit report from each of the three nationwide credit reporting companies free of charge at AnnualCreditReport.com. During the COVID-19 pandemic, Equifax, Experian and TransUnion are continuing to offer free weekly online credit reports through April 2022. Dispute errors. Look for signs of any identity theft. Your credit report influences your credit score.

Pay your bills on time. Focus on your budget and making sure you have enough money to cover the bills when they're due.

Build an emergency fund. If you have extra cash sitting on the sidelines, you may not need to automatically run up a credit card balance to cover big bills, such as when new brakes are needed for the car.

Don't borrow anywhere close to the credit limit. Think about it. A consumer who is borrowing too close to the being "maxed out" looks like they're heading for financial trouble. Many don't realize that your score is likely to be hurt if you're charging 40% or 50% or more of your available line of credit.

"Experts advise keeping use at no more than 30% of total credit limits," according to the CFPB.