Why Credit Scoring Algorithms Perpetuate Ethnic Bias

The problem with data relevant to credit scoring and the algorithms that use them, is that they are based on the past. Due to this, whether the discrepancy is intentional or not, there is an intrinsic bias built in the current credit scoring system provided by the 3 bureaus. How is an algorithm inherently biases against communities of color and other ethnic minorities? Well the data derived in the algorithm is based on the past. And the past is based on centuries of discrimination, redlining and financial exclusivity. Due to this current credit models tend to contain future biases towards communities of color and other ethnic minorities. The best example of this is the CFPB study performed in 2012 which outlines the credit scores of 200,000 American consumers. This can impact an individual’s life in many different ways but most commonly it will impact their ability to purchase a home, receive favorable lending terms on any extensions of credit, and generally make life harder by getting disapproved for leases, etc. Credit worthiness is not the end all be all in any regard but it does grant some ease with regards to helping consumers get access to quicker and cheaper capital. It also helps provide larger credit opportunities and extra interest savings by allowing for better terms on many borrowing opportunities.

Why Stifled Credit Can Affect Your Ability to Grow

Having bad credit can hamper your ability to succeed and negatively impact your future. Those with access to more capital typically have easier and better opportunities to grow and succeed financially. Since this is the case, it could potentially be argued that this lack of credit opportunities further perpetuates the ethnic bias that’s built into the credit scoring system, further hurting minority groups.

For some consumers bad credit can prevent them from renting an apartment and being able to afford a car. Although some consumers are able to overcome these hurdles and succeed without access to cheap capital, loans, etc., there are cases of consumers not receiving access to capital and having it stifle their potential to grow, whether that be in a personal or business perspective.

Access to cheap capital is not everything when it comes to succeeding and laying inroads to achieve new heights but it certainly makes things easier for some, this is especially true for small business owners. For others however, it tends to get them into more trouble that it might be worth. It ultimately depends on what kind of consumer you are but having better credit opportunities definitely won't hurt you.

Housing, Employment and Transportation

If your credit score prevents you from getting approved for an automobile loan this could potentially impact your ability to remain employed or find a better source of employment. Having access to an automobile can free you up and potentially allow you to seek out a higher paying job. For landlords that check credit this could also potentially prevent you from getting approved for an lease. Prevention of a lease might prevent you from moving and seeking out better employment opportunities or attaining more affordable housing. These are just a few of the ways having low credit could potentially hamper a consumer's ability to achieve success in the longer term. So any ethnic or racial bias that is inherent in the credit score system is negatively impacting certain groups more than it is others.