Credit Reporting's Vicious Cycles

Abstract

This article argues that consumer credit reports can create two sorts of vicious cycles, which can contribute to 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, credit reports can amplify past problems with debt, most of which are brought on by systemic inequality. Loosening the neoclassical model reveals the possibility of even more drastic inequality amplification. The second cycle arises when credit reports are used on 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 economic instability and by forcing economically unstable individuals to pay more for insurance, they deepen their economic instability. The article concludes with several policy implications.

Keywords: credit reports, credit scores, credit checks, consumer credit, inequality