What your credit score indicates about your upbringing

An individual’s credit report narrates a tale of their formative years.

Recent findings, published last month by Harvard’s Opportunity Insights, indicate that a significant forecaster of an adult’s payment habits — the primary factor in credit scores — is the surroundings in which they were raised. The analysis, founded on data from over 25 million Americans, uncovers enduring variances in repayment habits surfacing by early adulthood attributed to race, hometown, and economic status.

These tendencies proved surprisingly resilient as individuals navigated economic mobility.

“It seems that credit bureaus can discern something about us by age 25 that remains remarkably consistent,” remarked co-author Jamie Fogel, a research scientist at Opportunity Insights.

A favorable credit score, typically defined as 661 or above, is a vital instrument for financial progress. It enables greater access to loans with reduced interest rates for education, vehicles, homes, or starting enterprises.

A robust score can also facilitate additional opportunities.

“Credit scores are also utilized to evaluate job seekers, renters, and even individuals seeking to purchase insurance,” Fogel pointed out. “Therefore, not having a good score can limit multiple opportunities simultaneously.”

Fogel and his collaborators aimed to conduct an ambitious, population-wide examination of inequalities in access to credit and the financial management skills that enable affordable borrowing. Anonymized data from a leading credit bureau was correlated with U.S. Census and tax information on approximately 1% of U.S. citizens.

“We managed to obtain a representative sample while simultaneously zooming in on specific cohorts,” Fogel clarified.

For individuals born between 1978 and 1985, parental data was also included. “This allowed us to analyze parents’ income as well as where they were raised,” Fogel noted. “Both factors proved to be quite significant.”

Credit bureaus’ scoring systems, devised to predict the probability of default, rely solely on recent repayment history. The bureaus are legally barred from including information regarding race, age, income, and location. Nevertheless, a growing body of research suggests that demographic disparities persist.

OI’s new analysis, featuring a big-data approach, unveils potent new insights. By age 25, the investigators discovered that Americans whose parents belonged to the lowest 20% of earners had an average credit score of 615. In contrast, those with parents in the top 20% averaged 725.

“Your parents’ credit score is highly predictive of your own repayment,” Fogel remarked.

Additionally, at age 25, Black Americans possess average credit scores nearly 100 points lower than those of white Americans and 140 points below Asian Americans.

Furthermore, these disparities appeared “almost indistinguishable” at age 65, Fogel stated.

Accounting for income, by examining only those from the lowest 25th percentile of parental earnings, still revealed a notable 69-point gap between Black and white individuals. Moreover, the average credit score for Black Americans in the top 90th percentile of parental earnings aligns closely with that of whites from low-income backgrounds.

It is highly likely that there exist racial disparities in job continuity, he added. “But we can focus on individuals who are consistently employed at the same company, with minimal income fluctuation. These disparities persist even then.”

Geographic trends were equally striking, indicating that children absorb financial lessons from their broader environment in addition to parental teachings.

Individuals from the Upper Midwest, New England, and selected regions of the western U.S. typically achieve the highest credit scores and thus reap the benefits of lower interest rates. In contrast, those from Appalachia and certain southern regions tend to have lower scores, resulting in unmet borrowing needs.

A selection of more detailed analyses revealed hyper-local variances. The nation’s highest overall credit scores (an average of 724) were found in Bergen County, New Jersey, directly across the Hudson River from New York City. Baltimore recorded nearly 100 points lower as the city with the lowest scores in the nation.

A separate examination, concentrating solely on Americans raised in low-income households, reaffirmed the impact of location on repayment tendencies. In Brooklyn, white Americans from low-income families had the highest average scores (719), while individuals with similar backgrounds in the Indianapolis area displayed the lowest averages (629).

Patterns observed in individuals who relocated from a place like Brooklyn to Indianapolis, or vice versa, were also revealing. Those who moved in early childhood were more inclined to adopt the debt-repayment practices of their new community. However, relocating during teenage years tended to preserve more influences from their original hometown.

“We don’t exactly understand what the mechanism is,” Fogel stated, “but there is undoubtedly something derived from your community that exerts a strong influence.”

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impact on your repayment practices.”

Within the document, the collaborative authors additionally explore potential justifications. For instance, earlier studies highlight the enduring behavioral repercussions of significant economic traumas, with the 1921 Tulsa Race Massacre cited as one such instance.

OI’s data further indicates that Black individuals and those residing in low-repayment neighborhoods are more prone to lend money to family and friends, with Black individuals also being less inclined than white individuals to obtain support from parents. Indeed, Black individuals are often the ones providing assistance to their elders.

Connections with earlier OI findings are particularly indicative. The geographical trends of repayment, newly integrated into OI’s online Opportunity Atlas, reflect prior research highlighting regional and racial discrepancies in achieving the American Dream.

“Locations that foster repayment are precisely the same locations that encourage upward mobility,” Fogel noted. “We can observe these locations nurturing repayment even when accounting for income.”

The co-authors do not perceive a straightforward solution, pointing out that the existing credit-scoring framework minimizes repayment disparities by race, geography, and socioeconomic status. More precise assessments would likely intensify inequalities, they commented.

Instead, the OI team urged more social scientists to investigate how race and childhood circumstances influence financial management abilities for life.

“If we aspire to enhance credit accessibility,” Fogel remarked, “we truly need to comprehend what transpires prior to individuals’ 25th birthday.”

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