Is Credit Scoring Fair to Minorities?

December 21, 1998, Reviewed February 4, 2011

"I was shocked to discover recently that my credit rating, called a 'FICO score', was poor, due largely to a 90-day past-due bill that I have every year because my work is seasonal. Comes the spring I always pay the bills in full… Most of my friends in the black community do the same… Is this FICO credit scoring system fair to us?"

It depends on what you mean by "fair". The FICO credit score is an objective measure of the likelihood that a loan made to a person today will be repaid on time. The score is based on a person's credit history and other objective factors that are demonstrably related to the likelihood of default on future ob;ligations. It is not affected by an applicant's color, sex, race, religion, where they were born, or where they live. If "fair" is taken to mean that minority loan applicants are judged on the same objective basis as white applicants, with personal prejudice no part of the equation, then it is fair.

It took much too long for the US to get to a system that was fair in this sense, and now that we have it, we don't like all the consequences. Black loan applicants are rejected more frequently than white applicants, and the immediate reason in many cases seems to be that blacks get lower FICO scores. Hence, some observers argue that credit scoring may be unfair because it does not take account of the special circumstances of blacks. The greater incidence of seasonal employment in the black community, the issue you raise, is one illustration.

The point is well taken, but I don't think the answer is to attack credit-scoring. The credit score is only one piece of information used by loan underwriters in determining whether or not a loan should be made. Underwriters may take account of a variety of factors, including special circumstance that may have affected the credit score. Indeed, as a larger part of their job has become automated, underwriters can and do give increasing attention to special circumstances. Such flexibility has been encouraged by The Community Reinvestment Act, which presses depository institutions to meet the needs of low-and-moderate income communities. Congress has also pressured the two large Government Sponsored Enterprises that buy mortgages in the secondary market, Fannie Mae and Freddie Mac, to do the same.

Yet lender flexibility does not mean a willingness to make a loan that the lender knows will become delinquent for 60 or 90 days every year. Rather, it means a willingness to work with you (or to refer you to others who will work with you) to set up a budget plan that will allow you to avoid delinquencies. There are many resources available to help you, but ultimately, the responsibility has to be yours.

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