Credit Building

About this Policy

Credit building is a crucial part of wealth-building in today’s financial reality. Reaching and maintaining financial stability is increasingly dependent on your credit score. Unfortunately, many Illinois residents, especially households of color, have been denied access to the crucial financial tools needed to build credit and put them on a path to financial health. This inequity has led to a stark racial disparity in credit scores as well as related indicators, such as education level, student loan debt, employment, income, homeownership, and home loan debt. Policies should be implemented at the local, state, and federal levels that would ensure equal opportunities to all Illinoisans and help close the racial gap in credit scores.

Policy Highlights

    Credit Disparities in Illinois

    49% of Illinois consumers have subprime credit. This means that almost half of all residents are paying higher interest rates on everything from credit cards to car loans to mortgages.

    But when we take a deeper look at credit score data in the state, we see stark racial disparities. Comparing different neighborhoods in Chicago and East St. Louis, we see the role structural barriers have in perpetuating the cycle of debt.

    Chicago: In Englewood, where 99% of the population is racially or ethnically minority, the average credit score is 603. This is 131 points lower than Lincoln Park, where only 17% of the population is a minority. Education is key to closing the income, wealth, and credit gap, but is not equally accessible— only 7% of people age 25 and older have a bachelor’s degree or higher in Englewood, compared with 82% of those in Lincoln Park.

    East St. Louis: In the Washington Park neighborhood, where 98% of the population is a minority, the average credit score is 600. That is 107 points lower than in Belleville, near East St. Louis, where only 22% of the population is a minority. Homeownership and home loan debt are closely tied to credit scores, and the racial gap is obvious. In Washington Park, the homeownership rate is only 46% compared to 77% in Belleville, and home loan debt in Washington Park is over $50,000 lower than in Belleville. Employment and a sufficient income are important precursors to building wealth and credit, but there are substantial racial inequities: Washington Park has a 26% unemployment rate, and 25% of households are low-income, compared to a 6% unemployment rate in Belleville, where only 12% of households earn low incomes.

    Learn More About Credit Score Disparities in Illinois

    Policy Priorities

    Expand Opportunities for Positive Credit Reporting: While utility companies report late payments to credit bureaus, on-time payments go unreported. Similarly, most credit reports and credit scores do not recognize on-time rental payment. Illinois Congressional Members should support efforts at the federal level to authorize voluntary full-file reporting of utilities, telecoms, and rental payments.

    Fund Credit Builder Loan Programs: The federal government, through its Assets for Independence (AFI) program, should consider adding a credit component to the Individual Development Accounts (IDAs) it already funds. IDAs, in their current form, have no impact on credit – even though many clients purchase credit-sensitive assets (like homes) at the conclusion of the savings period. If morphed into something like LISC Twin Accounts™, the cost of the program would be the same, but clients would build their credit while building savings.

    Enforce Restrictions on Employment Credit Checks: The State of Illinois prohibits employers from checking an applicant’s credit report unless that person is applying for a position that requires them to manage money. Yet, we continue to hear from residents that their poor credit score is preventing them from finding employment. The State must better enforce this law to ensure greater opportunities for workers.

    Expand Access to Safe Small Dollar Loans: Thousands of low-income residents find themselves in a cycle of debt due to predatory loans. In addition to tighter restrictions on these abusive products, residents need increased access to safe small dollar loans. Municipalities across the state should consider creating a “Linked Deposit Programs” to increase access and make lending cheaper and safer. At the federal level, Congress should fund the loan loss reserve fund for Community Development Financial Institutions. This fund is crucial in helping certified CDFIs defray the costs of operating small dollar loan programs.

    Strengthen Predatory Lending Reforms: Many Illinois residents are caught in a cycle of debt due to abusive fees and terms of payday loans, auto title loans, and rent-to-own contracts. These products are often the cause of bad credit and a history of collections. We encourage the General Assembly to close loopholes that allow companies to avoid consumer protection and usury laws, limit fees & interest rates, and put an end to the practice of loan rollover.

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