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Credit scores differ among race, ethnic groups.

Different racial and ethnic groups have substantially different credit scores, on average, despite indications that credit-score models aren't biased against any particular demographic groups and even as credit has become more widely available, concluded a study conducted by the Federal Reserve.

The Fed study, Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit, researched credit-bureau records and demographic data from more than 300,000 individuals.

The study, released in August, concluded that credit-history scores are predictive of credit risk for the population as a whole and for all major demographic groups. The higher/better the credit score, the lower the observed incidence of default.

However, the study noted, credit scores differed among blacks, Hispanics, unmarried individuals and those younger than age 30, and individuals residing in low-income or predominantly minority census tracts have lower credit scores than other groups defined by race or ethnicity, marital status, age or location.


"Group differences in credit scores are narrowed, but not always eliminated, when differences in personal demographic characteristics, in residential location or in a census-tract-based estimate of an individual's income are taken into account," said the Fed study.

The study found evidence to suggest that the credit characteristics included in credit-history scoring models do not serve as substitutes or proxies for race, ethnicity or sex. The Fed's analysis did suggest, however, that certain credit characteristics serve, in part, as limited proxies for age.

As a result, the credit scores for older individuals are slightly lower, and those of younger individuals somewhat higher, than would be the case had these credit characteristics not partially proxied for age.

"Evidence also shows that recent immigrants have somewhat lower credit scores than would be implied by their performance," said the study. "This finding appears to derive from the fact that the credit-history profiles of recent immigrants resemble those of younger individuals, whose credit performance tends to be poor relative to the rest of the population."

The Fed suggested that expanding the information supplied to credit-reporting agencies to include rent, other recurring bill payments, nontraditional uses of credit and the credit histories of the foreign-born in their countries of origin may provide a broader picture of the credit experiences of recent immigrants and other individuals.

The Fed's analysis backed up previous research concluding that credit has become more available over the past quarter-century. Credit scoring--as a cost- and time-saving technology that became a central element of credit underwriting--has likely contributed to improved credit availability and affordability, noted the study.

"The increase in credit availability appears to hold for the population overall, as well as for major demographic groups, including different races and ethnicities," said the Fed. "There is no compelling evidence, however, that any particular demographic group has experienced markedly greater changes in credit availability or affordability than other groups due to credit scoring."
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Comment:Credit scores differ among race, ethnic groups.
Publication:Mortgage Banking
Geographic Code:1USA
Date:Oct 1, 2007
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