Young Adults Credit Trajectories Very Widely by Race and Ethnicity

Today’s young adults are the most racially and ethically diverse cohort in U.S. history, yet legacies of structural racism still shape their economic prospects.

Young adults divergent credit trajectories underscore this trend. An Urban Institute analysis survey that draws upon millions of consumer records from a major credit bureau find young adults in a majority Black and Hispanic communities are more likely than their adulthood with lower average credit scores. They are also more likely to see their credit scores decline as they age. These disparities are rooted in decades of discriminatory policies that have intentionally and systematically denied communities of color equal access to affordable financial services and wealth-building opportunities.

Without dedicated interventions, credit disparities among young people will likely grow, causing the racial wealth gap to widen. A comprehensive suite of policies that addresses the root causes of racial and ethnic disparities is needed to ensure every young person in America has a bright future.

–Credit Score Disparities Among Young Adults

Compared with young adults in majority-white communities, young Black and Hispanics are more likely to begin their adulthood with lower average credit scores (In this analysis, communities are considered majority black, Hispanic or White when more than 60% of residents identify as that race or ethnicity).

Between ages 25 and 29, young adults in majority black communities have a median score of 644, and those in white communities who have a score of 687. Vantage scores below 600 are considered subprime, so people who have credit scores below that threshold are less likely to secure credit at affordable rates and are more likely to borrow high-cost forms of credit, such as payday loans, that can lead to cycles of debt and further erode credit scores.

–Where Young Adults Credit Trajectories Diverge

At the individual level, racial and ethnic disparities across credit outcomes become even more pronounced. Using a trajectory analysis, I examined credit scores among 18 and 29 year-old with credit records from 2010 20 2021.

Approximately one-third (32.9%) of young adults in majority black communities, and more than one quarter (26.2%) of young adult in majority Hispanic communities saw their credit scores decline during this period., compared with 21% of young adults in white communities.

These trends show signs of significant proportions of young adults in black and Hispanic communities are entering their prime earning and wealth-building, years with deteriorating credit scores that will hinder their chances of getting their own homes. Without access to wealth-building forms of credit such as mortgages and student loans offered at favorable rates, many young adults in minority communities will miss out on opportunities to build wealth and transfer assets to future generations.

–Addressing Deep Disparities Require Bold Solutions

The disparities in young adult’s credit are the results of racist practices and discriminatory lending going back to the days of Jim Crow throughout the 20th century. They have denied communities of color, especially those of African American and Hispanic ones, of equal opportunity to build wealth and spread their inheritances to future generations, something that can be easily done by their white peers with no problems whatsoever.

Without a holistic set of solutions, black and Hispanic youths will fall further behind their white peers. These solutions can include targeted policies to reduce disparities in credit, such as improving the accuracy of credit reports, considering alternative data in credit models, and addressing ongoing discrimination in lending decisions. Because debt is a primary driver of wealth disparities, reducing the disparities in credit outcomes would help close the gap when it comes to wealth among the races.

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