CFPB: Consumer Finance Background Impacts How People Establish Credit Histories

The Consumer Financial Protection Bureau (CFPB) released a study Wednesday (June 7) that shows the way consumers establish their credit history can differ based on their economic background.

According to a release by the government watchdog, consumers in low-income areas tend to become credit-visible due to negative records like a bad debt collection at a higher rate than those who are living in higher-income areas. Meanwhile, those living in higher-income locations are more likely to establish credit history by using a credit card or relying on someone else than are those living in low-income areas. What’s more, those who are transitioning into credit visibility because of bad debt and student loans has more than doubled in the past 10 years.

“It is no secret that low-income consumers face challenges in the financial marketplace,” said CFPB Director Richard Cordray in the release. “Today’s study shows that even at the beginning of their financial lives, they are faced with higher hurdles to gain access to credit, which hinders them from turning their version of the American dream into reality.”

The CFPB noted that in 2015 11 percent of U.S. adults or around 26 million people were credit-invisible and had no credit history at any of the nationwide credit reporting agencies. Without a sufficient credit history, consumers face barriers to accessing credit or higher costs. This issue disproportionately impacts consumers who are African-American or Hispanic and people who live in low-income neighborhoods. It can also impact some recent immigrants, young people just getting started and people who are recently widowed or divorced.

The study found that almost 80 percent of transitions occur before age 25 and credit cards are the most common way consumers establish credit. The study also found that the way consumers establish credit history – taking out a credit card, relying on a coborrower or having negative records – can differ greatly based on economic background. Consumers in low-income areas are 240 percent more likely to become credit-visible due to negative records, while consumers in higher-income areas are 30 percent more likely to become credit-visible by using a credit card.