Credit Scores & Indians: Recent Evidence on the Prevalence of Low Scores & Borrowing
Low-income individuals are less likely than their wealthier counterparts to invest in long-term assets and educational attainment. To some extent this might simply reflect the preferences of this population. On the other hand, it may be indicative of significant obstacles that prevent poorer individuals and households from creating wealth for themselves and ultimately their communities. Borrowing and access to capital is an important means by which most individuals and households are able to buy homes, automobiles and send their children (and themselves) to school. While it is quite well documented that American Indians residing on reservations tend to be poorer than the average American citizen, we know very little about the use of credit and creditworthiness of this population.
Recent research by Dimitrova-Grajzl et al (2015) provides a useful examination of credit scores and the types of borrowing that occurs for residents of American Indian reservations. Their research uses confidential-use Equifax data that indicates both credit scores and types of outstanding loans at the US Census Block level. In the figure below, they show that the average Equifax Risk Score (“credit score”) for individuals living completely within the borders of an American Indian reservation is about 30 points lower than individuals living in adjacent, nearby or regions that straddle the reservation areas. Importantly, they note that the average credit scores is almost always below 660 over the years in this dataset. That threshold indicates that an individual is a sub-prime borrower and often faces significant obstacles when applying for loans of any type.
Source: Dimitrova-Grajzl et al (2015)
In other analysis, the authors control for the characteristics of the Census blocks using data from the US Census and the American Community Surveys. The authors include measures of average education level, employment level, income level. They find that these measures do not always have a strong effect on credit scores. Additionally, when they control for the percent of the Census block that is American Indian, they find that this variable has a statistically significant and negative effect on average credit scores. This is some suggestive evidence that there may be other things at work in determining credit scores for individuals residing on reservations other than pure economic measures. While the authors are not able to establish discrimination as the reason for the observed results, it remains a possibility.
From a policy perspective, the research indicates the importance of existing Community Development Finance Institutions (CDFI) which tend to work within American Indian and other Indigenous peoples’ communities. These organizations are often operated by American Indian organizations; the CDFIs fill a role that is often unmet by commercial banks or lending institutions. These organizations provide a means for those residing on reservations that face several economic and financial obstacles to borrowing to gain credit and borrowing experience. In the US today there are over 68 CDFIs serving Native American communities that have average loan sizes below $30,000 suggesting that these institutions are serving the lowest end of borrowers. Additionally, there are over 18 Native-owned banks in the US. If discrimination persists in borrowing and lending, these institutions may play an important role in remedying this problem for Native Americans seeking credit.
Tribal governments have already undertaken direct lending and loan guarantee programs themselves that serve their tribal citizens. These programs are important in helping reservation residents establish credit as well as providing access to credit. Coupled with training programs in financial literacy (as those offered by Oweesta Corporation) these opportunities should improve the credit history and credit scores of those residing on reservations. Tribal leaders and policy makers interested in expanding opportunities for Native American asset creation would do well to increase their support for Native CDFIs and training opportunities.
Dimitrova-Grajzl, Valentina, Peter Grajzl, A. Joseph Guse, Richard M. Todd. 2015. “Consumer credit on American Indian reservations.”Economic Systems, 39, pp. 518–540.
Randall Akee (Native Hawaiian) is an Assistant Professor in the Department of Public Policy and American Indian Studies at UCLA. Dr. Akee completed his doctorate at Harvard University. He also spent several years working for the State of Hawaii Office of Hawaiian Affairs Economic Development Division. He has conducted research on several American Indian reservations, Canadian First Nations, and Pacific Island nations in addition to working in various Native Hawaiian communities. Follow me on twitter at: #indigenalysis
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