Predatory Loans Cost Communities of Color $400 Billion Between 2009 and 2012. Learn How Credit Repair Can Reverse That.
Everyone knows their credit score can have a big effect on borrowing power – and with that, the ability to buy a car, own a home, or obtain a fair credit interest rate. But have you ever thought about how your race plays into it?
For years, when it comes to calculating risk assessment. Studies show that just living in a primarily Black neighborhood can hinder your ability to get a mortgage loan, for example.
Another study found that from 2007 – 2009, to foreclosure at a rate almost double that of White people.
Not only that, but Latin and African-American borrowers often experience higher interest rates – according to research.
Overall, says, "Experts estimate that the higher rates of foreclosure on predatory mortgages wiped out nearly $400 billion in communities of color between 2009 and 2012. The companies that buy up debts and take people to court target people of color more than any other group."
These statistics are the sad reality of a system that stacks the odds against certain populations. But why is this the case?
The Reality of Credit Discrimination / The Credit-Debt Cycle of DestructionWhy do predatory lenders target people of color more than other groups? The harsh reality is, these demographic groups are often targeted for their financial vulnerability.
Debt.org says that predatory lending, “benefits the lender and ignores or hinders the borrower’s ability to repay the debt.” In other words, predatory lenders take advantage of people in tough situations, and with little financial know-how. This dubious practice results in profits for the lenders but leaves the borrower in a risky and potentially disastrous situation.
Wealth inequality by race is another contributor to credit discrimination. Pew Research says the net worth of White households was 13 times the median of Black households and 10 times that of Hispanic households in 2013.
A lower net worth means less money set aside for a rainy day and fewer resources to draw on (whether it’s savings or the help of a family member). Imagine this scenario: A low credit score makes it hard to get a loan, so your loan interest rates are higher. A higher interest rate is tougher to pay back, and you’re. Such predatory and high-risk, high-cost loan conditions have led many families to ruined credit, foreclosure, and even homelessness.
How Big Data Could Reinforce the Systemic OppressionDetermining credit scores has always been a complex game, and it’s becoming more so. The raging debate about fairness/discrimination in the risk assessment world continues to grow more heated as artificial intelligence plays a bigger role.
Your credit score is determined by information in your credit report including payment history, credit history, the balance-to-limit ratio on your credit cards, recent activity, and overall debt. More recently, it may also include other data points like your zip code, which dating platforms you use, or even sexual orientation and political beliefs.
Major players in the FinTech (financial technology) world to determine credit scores. Lenddo, for example, uses exclusively “non-traditional data derived from a customer's social data and online behavior.”
The problem with this is that data points like zip codes to systematically deny loans to people of color. And it could happen again.
How Credit Repair Businesses Help Break the Vicious Debt CycleYou may feel compelled to help because you know people who have been unfairly targeted with predatory loans. You may want to help because it’s happened to you. For whatever reason, if you feel driven to help others out of a credit trap, you may have what it takes to run a credit repair business and call yourself a hero.
Credit repair businesses reverse the discriminatory loan cycle by:
The higher your FICO® Score, the more money you can save in interest over the life of the loan. For example, say you're planning to borrow $350,000 for your home. With a score of 700 in the current interest rate environment (as of March 24, 2019), you could qualify for a 30-year fixed mortgage at 4.30%. Over the lifetime of the loan, you'd pay $273,834 in interest.
However, if you boosted your FICO Score by just 60 points to 760, that would take you into the next credit scoring band. Then, you'd qualify for a 4.08% interest rate, which means you'd pay $257,515 in interest over the life of the loan. That's a savings of $16,319. Imagine what you could do with those savings if you invested that money instead of paying it to the bank.
Poor credit scores make it difficult for consumers to land loans at reasonable interest rates and can perpetuate the vicious cycle of debt.
1. Not Reviewing Credit Reports Regularly
Errors happen on credit reports more often than they should and not catching them can have serious consequences, like drastically lowering a credit score. Experts in the industry recommend that credit card holders check their credit report at least once a year to see if any creditors have been misreporting information and that balances are accurate.
If there are discrepancies, credit repair specialists can send dispute letters to the credit bureaus to have those errors changed. A current and accurate credit report is the first step toward rebuilding a credit score and improving a consumer’s financial health.
2. Keeping a Balance on Credit Cards
Keeping a revolving balance on a credit card has many side effects:
· Interest rates can cost a cardholder a significant amount over time
· If the balance is due to a missed payment, it can result in late fees and hits to a credit score
· A high balance may impact a card users utilization rate, which has negative implications on a credit score.
A best practice with credit is to pay the balance off, in full, each month. After taking a credit repair certification class, you will know how to advise clients on the small day-to-day changes that can have a major positive impact on their credit score. If you must keep a balance, be sure it is less than 25% of available credit.
3. Opening Too Many Accounts at Once
Hard credit inquiries, which occur every time you apply for a new line of credit, it will result in at least a slight drop to a credit score. Hard inquiries cover many types of lending, like credit cards, auto loans, or mortgages. The more frequently someone applies for a new line of credit, the more dings their credit score will take. Spreading out inquiries is essential to keeping a credit score healthy.
4. Not Knowing Which Debt to Pay First
Paying down debt is an art. Some folks have debt in the forms of:
· Car loans
· Credit cards
· Student loans
And, not all loan rates and terms are created equally. To cost-effectively pay off debt, consumers should lay down the terms of each of their loans to see:
· Which has the highest interest rate
· What fees are associated with paying loans off early
By paying off high-interest loans quickly, consumers will amass fewer interest charges, freeing themselves from debt faster. As long as there aren’t fees associated with paying a loan off early, it’s generally wise to tackle those debts first.
5. Making the Minimum Payment Only
Just because someone is paying their credit card bill every month doesn’t mean they are helping their financial situation.
For example, if someone has a $2,000 balance on their credit card and a 15% interest rate, it would take more than 11 years to pay off the balance assuming the minimum monthly payment is $30. In this example, the debtor will also pay about $4,200 more in interest than the original amount borrowed.
To be more direct, paying only the minimum doesn’t do much to lower debt and credit card balances. Finding ways to loosen up funds and pay more than the minimum payment will help consumer’s dig out of their debt faster.
6. Ignoring Credit Utilization
Credit utilization is the calculation of how much available credit is being used. It’s an important metric. According to MyFico, 30% of an individual’s credit score is based on their utilization rate.
So, if someone has a credit limit of $10,000 across three credit cards and a combined outstanding balance of $5,000, their credit utilization ratio is 50%. This percentage would be a red flag to lenders. As a rule of thumb, the lower the ratio, the better. Experian recommends keeping the utilization rate below 30%.
A high utilization rate shows lenders that cardholders may be living beyond their means. Additionally, for cardholders who keep high balances, a single unexpected expense could push them over the limit making it challenging to pay back the amounts owed.
7. Close Old Accounts
Most of us rejoice once we know our credit cards have been paid off. But, what one does next can actually impact their overall credit rating.
Did you know that closing the account can actually lower your credit score?
As we covered in #6 on this list, credit utilization matters. If someone closes a line of credit, there will be a smaller amount of available credit, which will lower the utilization rate. Additionally, closing a credit card will decrease the history of credit. Both the lifetime of an account and available credit factor in an overall credit score.
More often than not, it’s better to keep the card open.
8. Apply for Department Store Cards
There are a few issues with department store credit cards, the first being that these cards come with very high interest rates — far higher than national brand cards such as Visa or MasterCard. According to CreditCards.com, the average retail card APR is 24.99%, compared to the average general-purpose credit card APR of 16.15%. If cardholders racks up charges and can’t pay the balance each month, they can expect to pay for it in interest. The second issue is the temptation that may come with a department store card. It may feel like the rewards can outweigh the negative aspects of the credit card but having access can be an unwanted invitation to spend exorbitant amounts of money on items you otherwise wouldn’t buy.