This article argues that, despite being the least discriminatory form of underwriting in history, consumer credit reporting can reinforce and deepen systemic inequalities. Credit reports can create two sorts of vicious cycles, which can contribute to cycles of poverty and deepen race-based disenfranchisement. The first takes place in credit markets themselves. Even on a neoclassical model of credit reporting, and especially on a model that accounts for cognitive imperfections, credit reports can amplify past problems with debt, most of which can be traced to broader forces that shape economic inequality. The second cycle arises when credit reports are used in extra-lending contexts. In non-lending contexts such as employment credit checks, credit reports do not seem to provide any useful information to employers, but they do reinforce the first vicious cycle and the disadvantage it amplifies. In quasi-lending contexts like insurance pricing, credit reports may provide predictive information, but the information they reveal seems only to be information about economic instability. By forcing economically unstable individuals to pay more for insurance (or making it harder to rent an apartment), the use of credit reporting deepens this instability. The fact that even a cheap and generally accurate system of underwriting can reinforce and deepen racial and economic inequities should provide reason to rethink the notion that "equal access" to consumer credit markets can truly serve egalitarian goals when the credit market is embedded in such a fundamentally unequal system.
Credit Reporting's Vicious Cycles,
N.Y.U. Rev. L. & Soc. Change
Available at: https://scholarship.law.ua.edu/fac_articles/717