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It seems only reasonable that considering someone’s credit history when deciding when to issue a loan is fair. What’s wrong with wanting to ensure a loan will be paid back or that the borrower is responsible? Yet is the current system fair, and more importantly, is it racist?

To answer that question, you have to understand what factors are considered in determining credit scores and how the individual components are impacted by race.

There are generally five factors that comprise your credit score:

1. Payment History: 35%

There is one key question lenders have on their minds when they give someone money: “Will I get it back?”

The most important component of your credit score looks at whether you can be trusted to repay funds that are loaned to you. This component of your score considers the following factors:

Have you paid your bills on time for each account on your credit report? Paying late has a negative effect on your score.

If you’ve paid late, how late were you — 30 days, 60 days, or 90+ days? The later you are, the worse it is for your score.

Have any of your accounts been sent to collections? This is a red flag to potential lenders that you might not pay them back.

Do you have any charge-offs, debt settlements, bankruptciesforeclosures, lawsuits, wage garnishments or attachments, liens, or public judgments against you? These items of public record constitute the most dangerous marks to have on your credit report from a lender’s perspective.

The time since the last negative event and the frequency of missed payments affect the credit score deduction. Someone who missed several credit card payments five years ago, for example, will be seen as less of a risk than a person who missed one big payment this year.

2. Amounts Owed: 30%

So you might make all your payments on time, but what if you’re about to reach a breaking point?

FICO scoring considers your credit utilization ratio, which measures how much debt you have compared to your available credit limits. This second-most important component looks at the following factors:

How much of your total available credit have you used? Don’t assume you have to have a $0 balance on your accounts to score high marks here. Less is better, but owing a little bit can be better than owing nothing at all because lenders want to see that if you borrow money, you are responsible and financially stable enough to pay it back.

How much do you owe on specific types of accounts, such as a , auto loans, credit cards, and installment accounts? Credit scoring software likes to see that you have a mix of different types of credit and that you manage them all responsibly.

How much do you owe in total and how much do you owe compared to the original amount on installment accounts? Again, less is better. Someone who has a balance of $50 on a credit card with a $500 limit, for instance, will seem more responsible than someone who owes $8,000 on a credit card with a $10,000 limit.

3. Length of Credit History: 15%

Your credit score also takes into account how long you have been using credit. For how many years have you had obligations? How old is your oldest account and what is the average age of all your accounts?

Long credit history is helpful (if it’s not marred by late payments and other negative items), but a short history can be fine too as long as you’ve made your payments on time and don’t owe too much.

This is why personal finance experts always recommend leaving credit card accounts open, even if you don’t use them anymore. The account’s age by itself will help boost your score. Close your oldest account and you could see your overall score decline.

4. New Credit: 10%

Your FICO score considers how many new accounts you have. It looks at how many new accounts you have applied for recently and when the last time you opened a new account was.

Whenever you apply for a new line of credit, lenders typically do a hard inquiry (also called a hard pull), which is the process of checking your credit information during the underwriting procedure. This is different from a soft inquiry, like retrieving your own credit information.

Hard pulls can cause a small and temporary decline in your credit score. Why? The score assumes that, if you’ve opened several accounts recently and the percentage of these accounts is high compared to the total number, you could represent a greater credit risk. Why? Because people tend to do so when they are experiencing cash flow problems or planning to take on lots of new debt.

5. Types of Credit in Use: 10%

The final thing the FICO formula considers in determining your credit score is whether you have a mix of different types of credit, such as credit cards, store accounts, installment loans, and mortgages. It also looks at how many total accounts you have. Since this is a small component of your score, don’t worry if you don’t have accounts in each of these categories, and don’t open new accounts just to increase your mix of credit type.

These factors are reasonable and fair. One of the factors is the types of credit and mix. There are mixed messages from the lending community about the value of home ownership. When applying for a home mortgage, lenders will tell you that home ownership will improve your credit picture. Credit evaluators say owning a home doesn’t in and of itself increase credit scores, but over time a good payment history will increase one’s score.

One of the factors considered by most lenders is one’s ratio of debt to income. Many lenders cap their debt/income ratio at 45%. If your monthly income is $6,000, your combined debt payments, including your new mortgage, car payments, credit cards, and installment loans, cannot exceed $2,700. Nothing racist yet, but imagine that minorities are paying more for every single one of those components. Minorities generally pay higher interest rates on mortgages, cars, credit cards, and installment loans, not to mention insurance. Because minorities pay more for everything, they qualify for less credit at higher rates. That would be racist if it could be documented.

Saying minorities generally pay more for everything would suggest a massive conspiracy involving the government and major institutions that surely couldn’t be true, could it? Starting with the government, the U.S. government invented redlining and allowed FHA and V.A. loans to be offered almost exclusively to white people until the Fair Housing Act of 1968. These loan programs are credited with establishing the middle class in America, and minorities were left out. Housing is similarly credited with establishing wealth which can lead to generational wealth. Minority families are less likely to be able to help their children develop credit because they don’t have the money or understanding to do so.

Something else I’ve suggested is that Banks are charging minorities higher interest rates for automobile loans and credit cards. Let’s check the record. In a 2012 MarketWatch survey of loan data from U.S. banks, these banks were found to be charging minorities 3.3 times more than other borrowers:

Citigroup Inc. issued loans to African Americans with rates 3.38-times more than other borrowers in 2011. Wells Fargo & Co. charged 2.28 times more, while J.P. Morgan Chase & Co. loaned out at rates 2.21 times higher. African Americans borrowing from KeyCorp, owner of KeyBank, saw rates that were 1.7-times higher.”

Wells Fargo is currently being sued for racist policies in home lending.

JP Morgan Chase made a $55 million settlement for its practices which they say were implemented by independent brokers.

JP Morgan Chase is also accused of discriminating against its minority employees, with a recording provided as receipts.

Despite being outlawed by the Fair Housing Act of 1968, redlining remains, as evidenced by a 2022 settlement by Old National Bank in Indianapolis.

The Department of Justice recently settled a redlining suit against Lakeland Bank.

Even digital lenders have found ways to discriminate without ever seeing the face of the borrower.

“A 2008 survey found that, although Black borrowers carried lower balances on their cards, they paid more interest. Specifically, a Black family that carried consumer debt with an average interest rate that made average monthly payments paid at least $100 more in interest on the debt than an average White family, despite the fact that the Black family borrowed less. This type of consumer racism dates back to the Reconstruction era and reflects an unbroken chain of laws and policies cementing racial economic inequality. Social norms and stereotypes serve to make this inequality appear cultural and personal, instead of structural.”
Racism in the credit card industry has long been established. When they fail to issue credit, borrowers can only use high-interest lenders specializing in those with little or no credit. Minorities pay more while qualifying for less.

I don’t want to leave out the insurance industry, which discriminates not explicitly by race but by location. You pay more by your zip code, so it’s living in a minority neighborhood that forces you to pay higher rates. See the difference? You pay more by living in a minority neighborhood, and they conspire to make it harder to move out.

I’m making a point that minorities living in minority neighborhoods pay more for everything. There are food deserts where major grocery stores have moved out. You either buy from corner stores at higher prices or spend more on gas driving to the grocery chain. Housing costs more, credit cards costs more, and insurance cost more. The smaller stores in your neighborhoods charge more because they don’t do the volume. All this impacts your credit.

Looking at the five factors, I began with. Your payment history can be affected because you have less disposable income than your white counterpart. Because you have less money based on paying more (without even addressing the income disparity), any unforeseen event could make it harder to pay your bills. Your amount owed is higher because you are paying more for purchases. The number of new accounts may be higher because it took longer to qualify for credit purchases, and those accounts haven’t been open as long. You may have taken advantage of a new loan at a lower rate to pay off older accounts if you need to pay off the old accounts to avoid the high annual fee. Your credit score goes down. Your credit mix may not be optimal because getting a mortgage at a reasonable rate is harder.

So yes, credit scores are often racist. If you are a minority fortunate enough to already live in an area with the right zip code and your parents were able to co-sign on your auto loan or put you on their credit cards. You may not have experienced what is happening to your brethren. All the rest of you are still subject to the systemic racism that still lives among us.

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