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Credit Scores and Reports

How race affects your credit score

For Black Americans, the road to wealth is not so smooth


Some might consider credit to be a great “equalizer” in the U.S. financial system. But for Black Americans, the road to a good credit score and the rewards it brings may not be as smooth as it is for other groups. For those who struggle with credit, the consequences can be far-reaching.

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Some might consider credit to be a great “equalizer,” since it gives lenders a set of parameters for determining whether a loan applicant can be trusted to pay back a loan.

But for Black Americans, the road to a good credit score and the rewards that it brings may not be as smooth as it is for other groups.

Though credit is ideally designed to be an objective measure, over the years, studies have shown that people of color are more likely to struggle with credit than their white counterparts.

For example, Black Americans are less likely to have access to a credit card than white and Latino Americans. Also, in a 2017 study by the Urban Institute, 50 out of 60 cities in predominantly nonwhite areas had median credit scores of 660 or lower compared to only four out of 60 cities in predominantly white areas with credit scores that low.

While there is no single answer to explain why credit seems more elusive to some than others, for those who struggle with credit, the consequences can be far-reaching.

See related: Why is your credit score important?

How cultural norms affect credit 

One way people learn about money and credit is seeing others interact with money and credit.

Yet, “in the Black community, we’re taught to not discuss certain things,” says Wesley Owens, who runs a Facebook group for people of color called Cracking the Credit Code. “We don’t talk money. We don’t talk credit. We’re taught that to discuss those things is taboo to a certain extent. In other communities, they’re taught the exact opposite. They’re taught to ask what something pays. They’re taught to ask, ‘How do I do XYZ?’”

That means a person may not discourage a young family member from opening a line of credit they don’t need because it could have a negative impact on their credit.

Still, others often decline to discuss credit or money matters because they are ashamed.

Often people will be embarrassed to share the current state of their finances, says Dana  S. Branham, a financial coach and author of “Money Mayday: 7 Steps to Cleaning Up Your Money Mess.” They don’t want people to know about the financial mistakes they have made, or they may feel ashamed that they don’t know more about managing their money. Not only will they avoid talking about money with their loved ones, but they may feel hesitant to reach out to a financial advisor or credit counselor for help.

“If you won’t talk a financial professional about it, then who are you talking to about it? And then how are your children supposed to learn if you’re not talking to them about it?” Branham adds.

Black families typically don’t have generational wealth to build upon, which means there is often less knowledge about money and credit being passed from family member to family member, says Branham.

“There’s a difference between managing your money and just paying bills. So many of our grandmothers and aunts and uncles just lived to pay bills. They were never able to get ahead enough to be managing money. So, figuratively, we’re starting at a deficit.”

See related: Overcoming the pay gap as a woman of color

Credit scoring and the racial wealth gap

Having a low credit score can have huge ramifications. A lower credit score means that if you qualify for a loan at all, you will pay more in interest on everything from a mortgage to a car, so less of your money stays in your bank account.

Over time, it becomes more difficult to build substantial wealth. In fact, the median white household has a net worth that is 10 times higher than the net worth of the median household of Black Americans, according to the Brookings Institution.

Even when Black consumers do have good credit scores, that doesn’t mean they will automatically find themselves with the white picket fence or experience financial security. In fact, Black consumers with credit scores of 700 or above were found to have a level of financial wellness that was comparable to other groups with credit scores below 700, according to a study by Elevate’s Center for the New Middle Class, a research firm based in Fort Worth, Texas.

Specifically, when compared to all Americans with a credit score below 700, Black adults with a credit score of 700 or higher were:

  • 80% more likely to live paycheck to paycheck
  • 50% more likely to say they have “too much debt”

Black Americans with a credit score of 700 or above were also less likely to have $1,200 for a financial emergency and less confident that they could meet long-term financial goals than their counterparts with lower credit scores.

While the Elevate study suggests that factors other than credit scores also contribute to the racial wealth gap, higher credit scores could give Black Americans leverage that they can use to build more wealth, experts say.

“If we could get our credit scores up and then get more loans to open businesses that make money or get loans to increase our assets, then our credit habits could help us to close the wealth gap,” Branham says.

How credit scores put Black Americans at a disadvantage

Credit scores can be a hindrance to Black Americans when it comes to homeownership.

Only 44% of Black families owned the home they resided in in the first quarter of 2020, compared to 73.7% of white families who owned their residence, according to real estate company Redfin.

Establishing credit responsibly is critical to becoming a homeowner, says Gigi Williams, a homeownership advisor for HomeFree-USA, a non-profit organization based in Riverdale, Maryland that specializes in preparing people of color to be homebuyers.

“Lenders want to know if you’ve made your past payments on time,” says Williams.

If Black Americans are more likely to have lower credit scores, it stands to reason that the barriers to homeownership may be higher. Low credit scores might also hurt efforts to start a business, particularly if an entrepreneur is trying to get a business loan, Owens points out.

The good news is one’s credit score today doesn’t have to be their credit score tomorrow. Despite the challenges, there are plenty of ways to improve your credit, such as by paying all bills on time and being mindful of your credit utilization ratio.

There are also credit scoring systems such as Experian Boost that use alternative data such as cell phone, utility, cable, internet and streaming service payments, so if you have a history of paying these bills on time, that could lead to a higher credit score.

Some of the mortgage lenders that work with HomeFree-USA have been open to the idea of using alternative credit scoring systems when evaluating applicants for a loan, Williams says.

Recently, President Biden proposed the creation of a public credit bureau that would factor in alternative payment data such as utility bills, which might make it easier for people with little credit history to get a loan. Under Biden’s proposed plan, negative information would drop off after about four years rather than seven years, which is typical with the three major private credit bureaus. That could also make it easier for someone to rebound from financial mistakes faster and reap the benefits of a higher credit score.

See related: How long does it take to go from bad credit to good credit?

Bottom line

Regardless of which credit scoring system is used, it is important that Black consumers understand the factors being evaluated and commit to taking actions that will be viewed favorably under that system. Equally important, Branham says, Black consumers should be willing to share their knowledge with one another of how credit works so the entire community can be uplifted.

“If you want better, you’re going to have to understand that credit is a part of almost everything that we do that involves us paying out money or receiving money,” says Branham.

Correction: An earlier version of this story inaccurately stated that Experian Boost incorporates rent payments. 

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