The Meaning of Credit Scores: Financial Citizenship and Family Obligations

Background and Purpose

Credit scores are of increasing importance for individuals; credit scores are sometimes used to screen job applicants and potential renters and to determine how much an individual will pay in finance charges for a car, healthcare financing, a home, or an emergency loan. People who lack a score or who have very low scores may be unable to participate fully in economic or social life. While numerous social interventions have focused on helping the economically marginalized access banks and promote “responsible” financial behavior, far fewer have focused explicitly on raising credit scores, and little research exists on how lower-income individuals understand credit scoring and its relation to their financial lives. This paper starts to bridge this gap in the literature by addressing the following questions:

1. How do economically vulnerable individuals think about credit as it relates to their financial wellbeing and goals?
2. What does the credit score represent to them and why?
3. How do family obligations and traditions affect individuals’ ability to achieve their desired credit score, and how do individuals respond?

 Methods

We use qualitative data from interviews with 58 participants in lending circles run by the Mission Asset Fund (MAF) in California. Individuals are placed into groups, and each member contributes about $100-$200. Over the course of 10 months, each individual is loaned the entire amount for a month and then repays it at the end of the month. MAF reports these repayments to two different credit agencies, with the goal of raising the borrower’s credit score.

 The semi-structured interviews averaged an hour, and one third were conducted in Spanish. The vast majority of the respondents were of Hispanic origin. Twenty-four percent were younger than 30, 57 percent were between 31 and 50 years old, and the remainder were 51 or older. Half of all respondents earned roughly $2400 a month or less. The majority had no or very low credit scores. Interviews were audio-recorded, transcribed, and systematically coded and analyzed using inductive methods.

Results and Implications

Our research suggests that low-and-moderate income people experience credit as a form of financial citizenship; a higher score is believed to lead to more control over financial decision making and represents the ability to attain additional goals, such as home ownership. For some individuals, though, achieving a higher credit score was an end in and of itself, symbolizing attainment of a certain status, but not necessarily a way to obtain additional financial products.

Finally, to reach a higher score, individuals must often sacrifice “extras” in life and change spending habits, which can put strains on family relationships. As credit scores go up, so too the opportunities to take on debt or more debt (as multiple credit card offers and retail rotating credit opportunities become available), and family members may have expectations that the individual take advantage of those opportunities, potentially putting the family at financial risk.