Character Credit among Low-Income Homeowners: Evidence from Detroit

• In Event: Beyond the Score: Innovative Approaches to Consumer Debt, Creditworthiness, and Financial Resilience

Abstract

An individual’s credit score is meant to provide an objective measure of their likelihood to repay debts incurred. In theory, the higher an individual’s credit score the more likely they are to pay off their debts, and vice versa. However, this is not always the case, and many individuals with otherwise low credit scores are quite diligent about repaying their debts. This suggests factors used to calculate the credit score miss important indicators of an individual’s likelihood to repay their debts. 

In this study, we interviewed 21 Detroit residents with low credit scores to better understand personal characteristics that the credit scoring system missed. The individuals we interviewed were homeowners who had been approved for a mortgage product by a Community Development Financial Institution. None of the individuals we interviewed had defaulted on their mortgages, and the CDFI was so encouraged by the performance of these mortgages that they were able to sell them on the secondary market and recapitalize their mortgage fund.

These results run counter to expectations based solely on their credit scores, and we identify three characteristics to explain their likelihood of repayment that the credit scoring system does not account for. The first of these is a strong sense of personal identity. Several of the individuals we interviewed understood the difficulty of their financial position, but saw their success as a homeowner as part of their personal journey. Identifying as a mother, for example, was for these individuals a statement of character; that they would do whatever they had to do to keep their children safe and housed. They saw their success as an example for their children. Similarly, some individuals overcame homelessness to be homeowners, and knew that they had the ability to handle any kind of adversity that might befall them. 

The second characteristic that made these homeowners successful was a healthy network of supports. This could be family, friends, associates, but individuals they could rely upon for all manner of support. Through these networks our homeowners could weather challenges associated with homeownership that would otherwise carry a heavy financial burden.

The third characteristic was knowledge of available resources. Having navigated systems for years, many of the homeowners we interviewed knew where to go for support. For example, several took advantage of appliance repair programs to insure against wear and tear. Others knew that they could negotiate with their creditors if they needed to make adjustments to their payments. Almost all were aware that resources were out there to help them should they need it, and that brought added security with making their monthly mortgage payments. 

What our interviews with these homeowners reveal is that credit scoring alone does not adequately capture the character of individuals, and the sense of responsibility they have to manage their debt obligations. And as the performance of these mortgages can attest, by widening the view of creditworthiness lenders can reach more borrowers.

Authors

• Michael Kloc, University of Michigan Ann Arbor
  Presenting Author

• Trina R Shanks, University of Michigan Ann Arbor
  Non-Presenting Co-Author

• Patrick Meehan, University of Michigan
  Non-Presenting Co-Author