Mr. Bill Collector

Apparently, AT&T wants to check your credit history before they sell you an iPhone, since a two year plan will cost somewhere in the range of $2500.  I know this because it happened today to Atlantic blogger Megan McArdle, and she was a little annoyed by it:

While I was buying the iPhone, they pulled me aside for a credit review. Since I have good credit, this was shocking–and humiliating. For a middle class American, telling your two friends in the store that the AT&T folks are having second thoughts about giving you credit feels a little like confessing that you’re a criminal. This is even though I know plenty of journalists with bad credit, the vicissitudes of the industry being what they are. I found myself earnestly protesting to the store clerk that seriously, I really do pay my bills on time, and I don’t run a credit card balance.

It turns out they just wanted to look at the activity on my account, since I’ve just applied for a car loan, and bought a Verizon broadband modem. But in a way, it’s a reminder of just how obsessed our society has become with borrowing money. The worst thing that happens to you if you borrow too much money is–it gets hard to borrow still more money. Yet during the recent financial crisis, commentators refer to bankruptcy, or foreclosure, as something akin dying of cancer, rather than losing your credit cards and moving to a rental flat. This may be because we so often confuse credit rating with moral virtue: good people have good credit, and bad people . . . well, best not say the “B” word out loud, lest the dread disease should spread to you.

Congratulations Megan McArdle, you just had your first taste of what being a black person is like.

In all seriousness though, African-Americans are far more likely to be subject to those kind of credit investigations than a white person of equal means, since on average, African-Americans are more likely to have some sort of serious credit liability.  From a 2004 issue of Black Enterprise magazine:

Federal Reserve Senior Economist and Project Director Arthur B. Kennickell conducted a survey of consumer finances to determine the distribution of wealth in the U.S. between 1998 and 2001. It was found that minority families added on debt at a rate far greater than they increased their incomes, thereby reducing the overall wealth building power of every dollar they earned. Minority families also racked up more than twice the debt of their white counterparts. White households did, however, hold a higher debt load in actual dollars than their minority counterparts, but their percentage increase in debt did not surpass their average income growth level.

Credit card debt has caused African American families to use critical financial resources to pay mounting monthly interest payments instead of saving or acquiring assets such as real estate. It has also caused long-term disadvantages for African Americans because of the way lenders assign interest rams and insurance companies set premiums. Financial companies base interest rates on credit scores that are calculated, in part, by looking at how people use their credit and whether they pay their debt on time.

It’s likely that creditors take this into account when assigning a credit score to African-Americans, which results in a lower credit score than what would be the case if the individual were white*.  And since credit scores are used in a variety of circumstances, these lower than usual credit scores end up hurting millions of financially stable African-Americans:

“Our research found that, while banks site branches in minority and lower credit score communities, they do not provide the same access to their services as those in higher credit score communities,” said Coleman. “And,even worse, there is often no way for those trapped with sub-prime credit scores to establish a prime credit score — which would enable wealth creation.”

Entitled “Financial Empowerment for the Unbanked and Underbanked Consumer:’Crossing the Red Line,’” the report was released at the Rainbow/PUSH Wall Street Project’s 2007 Economic Summit.

“For the first time, we can now see the ‘invisible red line’ — the onet hat everyone’s missed,” said Tennessee House Speaker Pro Tem Lois DeBerry,the chair of the NBCSL Task Force that studied the issue. “For years, people have wasted time diagnosing the symptoms and missed the underlying disease –how consumers’ credit scores are developed, how they are used to deny access and how the current system provides few opportunities to graduate from sub-prime to prime credit scores. We need to erase the ‘red line’ and re-write a green line.’”

“Having identified the problem, we found it especially disconcerting that there is no endorsed method by which consumers can move from a sub-prime credit score to a prime credit score,” said Colorado State Senate President Pro Tem Peter Groff, who serves as Executive Director of the University of Denver Center for African American Policy. “It’s a Catch-22. To build a prime score, banks require consumers to demonstrate positive credit; but banks won’t extend credit to these consumers without a prime credit score, leaving many trapped.”

Groff added, “Exacerbating the problem is that consumers’ on- time payment histories for things like rent, utilities, and non- traditional loans are not reported to credit bureaus. They’re responsible borrowers, but they are being prevented from graduating to a prime credit score, and thus from gaining access to the financial services and products needed to establish wealth.”

It’s really easy to call this entire situation “racist,” but I don’t think it is.  Or at least, there probably isn’t some group of individuals plotting to deny African-Americans access to decent credit, and thus, an opportunity to build real assets.  No, this is a perfect example of institutional racism.  Where the cumulative impact of many smaller racially-biased decisions in the past have led to a situation where African-Americans are disadvantaged from the start.  Unfortunately, the politicians most likely to support or propose something to remedy this situation – the Congressional Black Caucus – are also somewhat in the pocket of the credit industry.  Somehow, I don’t find that too surprising.

Update: To everyone who has arrived here by way of Megan’s place, welcome!  You should look around and stay awhile, if you’re so inclined.