Research and Statistics

CFPB: Many low-income consumers start credit on a bad note


Lower-income consumers are more likely than those with higher incomes to become ‘credit visible’ with negative items, according to the CFPB

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CFPB: Many low-income consumers start credit on a bad note

Lower-income consumers are more than twice as likely than those with higher incomes to become “credit visible” with negative items, according to a new report from the Consumer Financial Protection Bureau (CFPB).

The federal consumer watchdog agency’s study showed roughly 15 percent of consumers – about 1 in 6 – start their credit histories with nonloan items such as collections and public records, nearly all of which convey negative information about these consumers, the bureau said. More than 27 percent of consumers in lower-income neighborhoods start their credit history with nonloan records, versus 8 percent for those in higher-income areas.

“It’s no secret that lower-income consumers face challenges in the financial marketplace,” CFPB Director Richard Cordray said in a June 7 news 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.”

Starting a credit history with a derogatory item can hurt a consumer’s ability to borrow for a long time. A collection can stay on a credit report for up to seven years, and it can significantly lower the FICO score of someone with good credit.

Meanwhile, consumers in higher income areas are 30 percent more likely to become credit visible with credit cards and twice as likely to start by relying on a co-borrower or becoming an authorized user. The CFPB said credit cards are the most common way consumers begin their credit histories.

The CFPB recently began to evaluate how alternative data – such as utility and cellphone bill payment records – can be used to extend credit to consumers with little or no borrowing history. The agency has been taking public comments on alternative data since February. In a June 8 Consumer Advisory Board meeting, Cordray said the bureau is “digesting” that feedback.

The CFPB estimates about 26 million people have no credit history with at least one of the three major credit bureaus. A disproportionate number of those consumers are African-American or Hispanic and live in low-income neighborhoods.

Other findings included a surge in consumers who established their credit histories with student loans over the past 10 years. More than 26 percent became credit visible with student loans in 2016, compared to just 10 percent in 2006. And fewer consumers under age 25 are starting out by getting credit cards – 33 percent did so in 2016 compared to 40 percent in 2006.

Income level% Auto loans% Credit cards% Mortgages% Personal loans% Retail loans1% Student loans% Collection items2% Other3
Source: Consumer Financial Protection Bureau


1 – Refers to loans obtained to buy retail items
2 – Refers to accounts reported by third-party debt collectors
3 – Includes public records, delinquency utility bills, child support payments, etc.
How consumers at different income levels start their credit histories
Income level% Credit cards% Collection items1% Other2
Source: Consumer Financial Protection Bureau


1 – Refers to accounts reported by third-party debt collectors
2 – Includes public records, delinquency utility bills, child support payments, etc.

See related: 5 ways “credit invisibles” can build a credit profile

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