Credit reports and scores

Why the South has such low credit scores

Today, we look at a big, fat map of credit scores reproduced from a recent economics paper. And while the map suggests any number of tantalizing questions, we are most intrigued by that big band of credit-score calamity that stretches across the American South.

Almost every corner of America’s most populous region — every race, every income bracket — appears to have low credit scores. But why?

With precious few exceptions, it looks to be a neatly regional phenomenon. We spent hundreds of hours scraping Airbnb listings to determine the true extent of the American South, but we could have saved a lot of time if we’d just drawn a line around the contiguous places with low credit scores.

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The region’s poor credit means Southerners are paying more to borrow money, assuming they can qualify for loans at all. That sets them back in everything from car and home purchases to credit card rewards. Yes, even credit card rewards.

The researchers behind the map — Sumit Agarwal of the National University of Singapore, Andrea Presbitero of the International Monetary Fund, and André Silva and Carlo Wix of the Federal Reserve — examined 2019 data from 238 million credit cards and found that rewards programs such as American Express Gold effectively siphon billions of dollars a year from lower-income counties, many of them in the South, and transfer the cash to well-heeled enclaves loaded with professionals who tend to take advantage of such programs.

Our first guess about what might be happening here involves race. Almost 3 out of every 5 Black Americans live in the South, and they make up almost 20 percent of the region’s population. Centuries of slavery, sharecropping, apartheid and exclusion from many elite educational institutions left some Southern Black folks with little credit and even less collateral.

But when we ran the numbers, the Blackest parts of the South had roughly the same credit scores as the least-Black areas. And their scores were far lower than places with similar Black populations outside the South. So while race may play a role, it’s probably not the defining factor.

Next, we wondered about poverty. After all, the South has the highest poverty, lowest income and lowest education rates of any region in the country. And as you might expect, counties with lower income and lower college graduation rates tend to have lower credit scores.

But in this case, demography is no match for geography. Even some of the South’s biggest, most dynamic cities — think Atlanta or Dallas — have the same below-average credit scores as their more rural Southern neighbors. Within every income bracket, the typical Southerner has a lower credit score than someone who lives in the Northeast, Midwest or West.

With the obvious factors ruled out, we were stumped. Until we called economist Breno Braga at the Urban Institute, a nonprofit, nonpartisan D.C. think tank. Braga, who studies how credit-ratings data quietly determines so much about our lives, took about 16 seconds to diagnose the problem.

“The reason why credit scores are so low in the South has gotta be connected to medical debt, because that’s the most common type of unpaid bill that people have,” Braga said. And the South, he said, easily has the highest levels of medical debt in the country.

Of the 100 counties with the highest share of adults struggling to pay their medical debt, 92 are in the South, and the other eight are in neighboring Oklahoma and Missouri, according to credit data from the Urban Institute. (On the other side, 82 of the 100 counties with the least pervasive medical-debt problems are in the Midwest, with 45 in Minnesota alone.)

And sure enough, when you look at areas across the nation where adults are struggling to pay down medical debt, they have similar credit scores.

Medical debt may not be the only force behind the South’s credit struggles, but it appears to be a key contributor. So where did it all come from? And why is it concentrated in the South?

One answer is that the South is simply less healthy than any other region. Data from the Centers for Medicare and Medicaid Services shows that among Medicare recipients, the population for which we have the best data, those in the South are substantially more likely to suffer from four or more chronic conditions. And poor health tends to go hand in hand with people having overdue medical debt and poor credit scores.

But health alone does not solve the puzzle: Several Northeastern states struggle with chronic health conditions and have good credit.

A clue to the broader answer comes from a recent analysis in the Journal of the American Medical Association, which found that medical debt “became more concentrated in lower-income communities in states that did not expand Medicaid” after key provisions of the Affordable Care Act took effect in 2014.

To reach that conclusion, Raymond Kluender of Harvard Business School, Neale Mahoney of Stanford University, Francis Wong of Ludwig Maximilian University of Munich and Wesley Yin of the University of California at Los Angeles looked at detailed credit-report data from 2009 to 2020. (Mahoney is currently on leave to serve on President Biden’s National Economic Council.)

Of the 11 states that have yet to expand Medicaid, eight sit in the South, according to KFF, a San Francisco health-policy nonprofit. Southerners were more likely to be behind on medical debt even before the ACA, but the reluctance among the region’s mostly Republican governors to participate in the Medicaid expansion has increased the gaps between the South and the rest of the country.

In states that immediately expanded Medicaid, medical debt was slashed nearly in half between 2013 and 2020. In states that didn’t expand Medicaid, medical debt fell just 10 percent, the JAMA team found. And in low-income communities in those states, debt levels actually rose.

The effect went beyond medicine. Folks enrolled in Medicaid under the ACA saw their overall debt in collections fall by about $1,140 through 2015, according to a Journal of Public Economics analysis. People in low-income neighborhoods also saw significant reductions in unpaid bills and debt sent to collectors after the Medicaid expansion, the analysis found.

“Expanding Medicaid could help a lot, but these states just don’t do it,” Braga told us. “And they don’t realize how much of an impact that actually has on people’s lives and their financial well-being — even access to employment. If you have a bad credit history, employers might deny you work, you know?”

Credit-rating agencies and their partners — such as Fair Isaac Corp. (FICO) of Bozeman, Mont. — reduced the role that medical debt plays in their scores in 2017 following a settlement between credit-rating agencies and 31 states’ attorneys general. Still, the share of residents with overdue medical debt remains more strongly linked to a county’s credit score than any other factor we considered, including debt related to car loans, credit cards and student loans.

Last year, the federal Consumer Financial Protection Bureau (CFPB) issued a scathing report finding that medical debt is “an unexpected, unwanted, and financially devastating expense” that is “far less reliable and predictive of people’s ability to pay their bills” than other kinds of borrowing.

Within weeks, the big three credit-reporting bureaus (Experian, TransUnion and Equifax) announced steps to further reduce medical debt’s influence on credit scores — though Justin Hakes of the Consumer Data Industry Association, which represents the bureaus, said the changes were “not the result of recent reports from the CFPB and other regulatory bodies.”

Starting this year, medical bills under $500 will no longer affect your credit report — even after they’re sent to collections. That should wipe an estimated two-thirds of medical-debt collections from credit reports.

However, that move could push the South even further behind. According to the CFPB, “people living in the north and east are more likely to benefit” from the change, as they have debts that are more likely to fall below the $500 threshold.

Hi, friends! The Department of Data wants your data questions! Are you curious about why companies are so likely to have exactly 500 employees? Which state is most energy-efficient? Why German ancestry tends to correlate with good credit? The age at which Americans are most likely to receive an inheritance? Just ask!

If your question inspires a column, we’ll send an official Department of Data button and ID card. This week’s buttons go to blogger, traveler, podcaster and economist Tyler Cowen of George Mason University, who first brought to our attention the study containing the credit map, and our new colleague Luis Melgar, a graphics reporter who started us down the medical-debt trail.

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