New research from an interdisciplinary team of scholars at UW-Madison shows that mothers with low incomes have a strong awareness of credit scoring, do not reject the credit scoring system’s legitimacy, and look to work within this system to pursue their financial goals.
Published in the Journal of Consumer Affairs, this mixed-methods study examines consumer perspectives on the credit scoring system drawn from in-depth interviews with 72 mothers with low incomes and national survey data from the National Financial Capability Study. The findings of this study could have important implications for a financial system that has been critiqued by researchers and advocates in the United States for further disadvantaging those who are financially marginalized.
People of color and women disproportionately receive lower credit scores, driven in part by systemic racism and sexism that leaves them with lower incomes and assets and more limited choices of high-quality financial products. Sixty-four percent of the women interviewed in this study identified as Black and 10 percent identified as Hispanic.
“The mothers we talked to face an array of systemic barriers and must juggle an array of potential financial trade-offs as they work to take care of their children well in the present and set themselves up to get ahead financially in the future,” says Sarah Halpern-Meekin, Professor of Public Affairs at the La Follette School of Public Affairs and the Vaughan Bascom Professor of Women, Family and Community at the School of Human Ecology.
The in-depth interview data was drawn from Baby’s First Years, the first study in the United States to assess the impact of unconditional cash transfers to mothers with low incomes on child development. Seventy-two mothers from Louisiana and Minnesota took part in this part of the study, which included four waves of interviews. At the time of the first interview, mothers ranged in age from 19 to 42 years old with a median age of 27.
“For better or worse, this is the system we have in place in the United States. Despite the fact that it often creates barriers or problems for them, the low-income moms we talked to are engaged with financial services broadly, and especially dealing with their credit history,” says J. Michael Collins, Professor of Public Affairs at the La Follette School of Public Affairs and the Fetzer Family Chair in Consumer and Personal Finance at the School of Human Ecology. “They can ‘play the credit score game’ in pursuit of their financial goals.”
To complement the qualitative interview data, the study used the National Financial Capability Study for nationally representative descriptions about credit awareness among women between the ages of 18 and 44 with annual household incomes less than $25,000. Ninety percent of the survey respondents reported knowing their own credit score.
In the face of systemic barriers, the participants in this study do not disengage from the credit scoring system. In interviews, many described hopes for financial independence and family security that they hoped they could achieve by building up their credit.
These insights can help researchers and policymakers as they consider changes to the credit scoring system that make it more equitable and responsive to financially marginalized Americans who, despite it all, remain willing to work within the system.
“Any changes to the credit scoring system should consider potential unintended consequences of worsening credit scores or deepening credit invisibility, especially if such changes would include rental and utility payment histories, both commodities of which families with lower income often contend with when facing substantial financial constraints,” says Melody Harvey, Assistant Professor of Consumer Science at the School of Human Ecology.