Credit scores provide lenders with a snapshot of an individual’s financial history in three-digit form that they use to decide whether they approve loan applications. Low scores could result in higher interest rates on mortgages, car loans and credit cards.

Credit bureaus do not take race or income into account when creating their data; however, systemic racism has an influence in what informs this data. In this series, we’ll explore why credit scores in the South tend to be lower than other regions of the country.

Poor Demographics

Credit scores in the United States have been shown to be strongly tied with income levels. People with higher incomes tend to have better credit scores than those with lower ones; unfortunately, many low-income households in the South are struggling financially and this can have an adverse effect on credit scores.

The Southern poverty rate is significantly higher than in other parts of the nation; 24.9 percent of its population lived below federal poverty threshold in 2019 as opposed to only 14.8 percent nationally, which may explain why scores in this region tend to be significantly lower than elsewhere.

But it’s not just poverty reducing credit scores; other factors are having an effect, including age, gender and race. Younger adults typically have lower credit scores due to less experience managing money and paying bills.

Women and minorities also tend to have lower credit scores than whites due to factors like pay gaps, education disparity gaps and financial insecurity. A recent study conducted by the National Center for Education Statistics (NCES) discovered that students living below federal poverty threshold scored worse on mathematics and reading tests compared to peers not in such households, due to being forced to devote more of their time focusing on survival rather than academic pursuits; which can impede performance on tests and academic achievements.

Attributes that negatively influence credit scores include the racial and ethnic disparity in educational achievement, including teacher and staff vacancies, absenteeism and student mental health services; furthermore some districts do not possess sufficient resources to provide every child with equal education opportunities.

Even with all these challenges, some lenders and credit bureaus are working hard to improve credit scores across the South and nation. These organizations use new methods for assessing creditworthiness and helping individuals secure loans; additionally they partner with third-party platforms to make identity verification simpler for people with poor credit scores.

Medical Debt

Medical debt is one of the primary contributors to lower credit scores in the South than other regions of the nation, as it causes many people in this region to have trouble qualifying for loans, as well as difficulty building wealth even when they do qualify.

Urban Institute researchers recently released a report showing that medical debt in the US currently totals nearly $150 billion, almost half the amount listed by credit reporting agencies on consumers’ credit reports (about $88 billion). To conduct their analysis, researchers gathered and analyzed data from a nationally representative, anonymous, 10% sample of consumer credit reports observed monthly between 2009 and 2020 using statistical techniques to track over time and categorize various forms of debt; additionally they explored any correlations between Affordable Care Act Medicaid expansion and individual medical debt distributions.

The report revealed that in June of 2020, approximately 17.8% of individuals carried some form of medical debt on their credit reports, with an average debt stock per individual accrued within one year averaging $429 compared with non-medical debt averaging around $119 per individual during that month. Furthermore, income groups such as households making less than $35,000 annually being twice as likely to carry medical debt on their reports than households earning $100,000+ annually.

Adults in medical debt are more likely to delay or forgo receiving healthcare, leading to worsened health and increased costs for both themselves and society. They’re also likely to cut back on food or housing needs to pay medical bills; or take money out of retirement or college savings accounts just so they can cover medical bills – according to KFF research. Furthermore, they’re at greater risk for entering a cycle of debt which could eventually lead to further medical expenses and bankruptcy proceedings.

Amy Kluender of KHN-NPR conducted an investigation that revealed Mississippi residents, specifically, are much more likely to carry medical debt than residents in states that have expanded Medicaid such as Indiana or Washington. Mahoney of Urban Institute believes other factors contribute to Mississippians having unaffordable medical bills such as cost-sharing arrangements and high deductibles but that being poor makes one even more likely to incur debt in this region.

Lack of Health Insurance

The South is home to some of the highest rates of uninsured Americans and has some of the lowest average credit scores, which poses serious problems for residents living there. Health care issues tend to compound other financial challenges for these residents – according to new analysis by NiceRx, nearly one out of every five non-elderly adults without coverage opted out due to cost issues; furthermore, residents in this region tend not to achieve credit scores of at least 720 considered excellent.

Initial speculation suggested the problem lay with average income levels being lower in many Southern states, making loans less affordable, which has an adverse effect on other aspects of life. But closer examination of the data shows it goes further; poor credit scores in the South are driven more by medical debt and lack of health insurance than by race or poverty; indeed, even when controlled for factors like education and income levels, Southerners still score lower on credit reports than people of similar age in other parts of the country.

One major reason is that, unlike in other regions, most counties in the South tend to have low college graduation rates and predominantly rural environments. Furthermore, poverty levels in these counties tend to be high and incomes relatively low – conditions which compound health needs further.

Additionally, the Affordable Care Act (ACA) and Medicaid expansion offers new opportunities to bring people into health insurance systems in Southern United States, alleviating medical debt while improving credit scores – but some state lawmakers have refused federal funds intended for expanding Medicaid programs.

Starting this year, the Consumer Financial Protection Bureau (CFPB) is taking steps to alleviate some of this strain on credit reports by wiping medical debt under $500 that has been sent into collections off their reports if sent. While this should help some borrowers in this region regain their scores more easily, it will do little for those whose debt exceeds this threshold and have been sent into collections agencies.

Politics

Credit scores are an integral component for Americans looking to purchase homes, cars and/or invest in higher education. But according to The Washington Post, residents in Southern states on average tend to have lower scores than their counterparts from northern states – one potential reason could be medical debt being reported on credit reports as it’s reported on credit reports; another factor could be most Southern states refusing additional federal funds provided through Affordable Care Act for expanding Medicaid as another factor behind having more medical debt and poorer credit scores than their neighbors elsewhere in the nation.

One major concern in the South is the resurgence of racial politics. As middle and working-class whites’ economic fortunes declined, racial division filled its political vacuum. This trend spread down into state legislatures; now many of them boast Republican super majorities in both houses of their legislature.

Politics aside, rural Southerners face difficulty accessing credit. According to The Post’s research, they are more likely to have their mortgage applications denied than consumers living in urban areas of their states, and when loans do become available they typically incur higher interest rates than urbanites.

Finaly, due to their lower incomes and less favorable educational outcomes than urban counterparts, rural Southerners can sometimes find it harder than urbanites to secure loans for themselves and build wealth and improve credit ratings. Without access to financing opportunities they may never achieve success in building wealth or improving credit ratings.

There are lenders using alternative data to assess creditworthiness and help people out of their credit holes. These lenders take into account factors that traditional banks don’t, like income, education and credit history – this means they can offer credit to those otherwise excluded from the market, helping bring financial inclusion to the South.