What You Should Know About Credit Discrimination

It could be tough to tell whether you’re being denied a credit line because you’re part of a minority group. Discrimination can be subtle. Spotting credit discrimination is easier than proving it, but there are ways to go about it, potentially winning you a legal case in court—or through a complaint submitted to a regulator that enforces fair lending laws. 

By the same token, it’s possible to boost your chances of being approved for a loan or a line of credit. We’ll take you through the steps to get you there.

What Is Credit Discrimination?

Credit discrimination happens when a lender treats you differently during the credit process because of who you are, not because of your ability to repay. Federal law says lenders can’t deny you a loan, credit card, or line of credit, or offer you worse terms, based on your race, color, religion, national origin, sex, marital status, age, or because you receive income from public assistance.

Lenders can still base a credit decision on factors related to your finances, such as your income, your debt, and your credit history. The law only limits how they can use factors that have nothing to do with your ability to repay.

You May Like These

What You Should Know About Access to Student Loans

How to Use Home Equity

How to Reduce Expenses and Save Money Every Month

How to Position Yourself for Approval

Getting approved for credit isn’t random—you can improve your chances with the right steps. Lenders want to know you’re reliable, so here’s how to stand out as a strong applicant:

• Review your credit reports and correct errors. Your credit scores matter, and your scores are based on what’s in your credit reports. Check your credit reports for mistakes, like incorrect late payments, and get them corrected. Errors can hurt your chances.

• Reduce your debt. Keep credit card balances as close to zero as possible. High balances suggest financial strain, which is a risk for lenders.

• Show steady income. A stable job and consistent earnings make you look dependable. If your finances are shaky, work on stabilizing them.

• Apply strategically. Don’t apply unless you really need to. When you’re shopping for a loan, it’s okay to apply with multiple lenders, but do so within a two-week window to protect your credit standing.

• Consider a co-signer or secured card. If your credit isn’t strong, a co-signer with good credit or a secured card might help you get approved.

Credit Discrimination Is Illegal

The Equal Credit Opportunity Act prohibits lenders from discriminating against you based on things like race, age, or marital status. The idea is to protect you from racism, sexism, and other -isms that have nothing to do with your creditworthiness.

Access to credit is crucial for opening credit cards, taking out auto loans, and applying for mortgages. It’s unfair and unreasonable for lenders to deny you a credit card just because you’re Black or offer you worse terms on a mortgage just because you’re a woman.

Credit Discrimination in the U.S.

Credit discrimination has a long history in American housing policy. From the 1930s through the 1960s, the Federal Housing Administration insured mortgages under a system that favored white, suburban neighborhoods and excluded many Black communities through a practice known as redlining, according to the Federal Reserve’s history of the practice.

The effects still show up in lending data today. A 2022 Urban Institute analysis found that mortgage applications were denied at a rate of 27.1% for Black borrowers and 13.6% for white borrowers, against an overall denial rate of 16.1%.

What Does Discrimination Look Like?

It’s one thing to know that discrimination in lending is illegal. It’s another to know what it looks like in everyday life. The Consumer Financial Protection Bureau (CFPB) says that discrimination is often hidden or even unintentional, and that you might be a victim of discrimination without realizing it right away. Here are some warning signs to look out for. 

You might be discriminated against if you’re: 

• Treated differently in person than on the phone

• Offered a deal that sounds too good to be true

• Pressured to accept an offer

Take note of how you’re offered credit and the terms you’re offered. Other signs of discrimination could include: 

• Discouraged from applying for credit

• Refused credit even though you qualify

• Offered credit with a higher rate than the one you applied for, even though you qualify for the lower rate

• Denied credit, but not given a reason why or told how to find out why

Of course, if you hear the lender make negative comments about race or other protected group, that could be an obvious red flag.

3 Types of Credit Discrimination

Credit discrimination generally falls into three categories.

1. Overt discrimination

Overt discrimination happens when a lender states a discriminatory reason for a decision outright. For example, a lender might tell an applicant their loan was denied because of their religion.

2. Disparate treatment

Disparate treatment is when a lender treats applicants differently based on a protected characteristic, even if the lender doesn’t say so directly. It’s more common and more subtle than overt discrimination. For example, a lender might ask one applicant for extra documents while a similarly qualified applicant isn’t asked to provide them.

3. Disparate impact

Disparate impact happens when a lender applies the same policy to every applicant. That policy may still affect one protected group more than others. For example, a lender that won’t approve loans under a certain amount could unintentionally exclude applicants in communities where home values are lower, even if the policy wasn’t written with that intent.

Fair Lending Laws Prevent Credit Discrimination

The Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) forbid unlawful discrimination. The FHA was created in 1968 and mostly regulates home loans, and the ECOA, started in 1974, regulates all types of credit, such as loans and credit cards.

Fair Housing Act (FHA)

The Fair Housing Act gives you leverage over housing and property lenders that discriminate unjustly. For example, by raising a deposit minimum because you’re a single woman. That’s illegal credit discrimination, and you can contact a regulator or lawyer to compensate you for it.

According to the Department of Justice, the FHA makes it illegal for lenders to discriminate on the basis of race or color, religion, sex, national origin, familial status, or disability.

Equal Credit Opportunity Act (ECOA)

The Equal Credit Opportunity Act offers protection from lenders that might discriminate unjustly. For example, offering you a credit card with terms worse than advertised because you’re on Medicaid (public assistance) is illegal.

The Act makes it illegal for lenders to:

• Refuse credit if you qualify for it

• Discourage you from applying for credit

• Offer credit on less favorable terms, like a higher interest rate, than those offered to someone with similar qualifications

The Act clearly outlines that lenders can't offer poor terms or close your account on the basis of: race, color, religion, national origin, sex (including gender identity or sexual orientation), marital status, age, receiving public assistance, or exercising in good faith your rights under the Consumer Credit Protection Act. 

On the flip side, lenders can’t discriminate in your favor. Fair lending laws make it illegal for lenders to offer services exclusively to minorities and discriminated groups mentioned. For example, you won’t typically find lenders that only offer credit cards to women.

However, lenders can specialize in offering financial products to minority groups. For example, home loans for disabled adults are widely available. You might find financial companies that advertise lending products to women and offer support tailored to women, even though they also offer the same lending products to men. 

Under the Equal Credit Opportunity Act, lenders can’t:

• Offer you different terms, interest rates, or fees based on your race, sex, religion, or other protected characteristics

• Close your account because of a protected characteristic

• Discourage you from applying for credit or reject your application based on a protected characteristic

• Ask about your plans to have or raise children

• Ask whether you receive alimony or child support, unless you’re using that income to qualify for the credit

• Require information about your spouse if you’re applying for a separate, unsecured account and you don’t live in a community property state

Civil Rights Act (Section 1981)

Section 1981 of the Civil Rights Act also prohibits race discrimination in credit decisions, separately from the ECOA and the Fair Housing Act. 

Your Right to Know Why You Were Denied

If a lender denies your application, they generally have to tell you why or explain how you can ask for the reason, within 30 days. This is called an adverse action notice. If the reason given doesn’t match your financial profile, or feels inconsistent with how you were treated during the application, it could be a sign of credit discrimination worth reporting.

How to Submit Credit Discrimination Complaints 

The Consumer Financial Protection Bureau (CFPB) and other government agencies fine and punish lenders that break the law. You can submit a complaint to the CFPB; it will investigate your case. If successful, you may be awarded compensation or get access to a credit line. The Federal Trade Commission (FTC also covers retailers, finance companies, and other creditors.

You may also call the CFPB directly at (855) 411-2372. If the discrimination involves a mortgage or other home loan, you could file a separate complaint with the U.S. Department of Housing and Urban Development’s Office of Fair Housing and Equal Opportunity.

Contact the lender first

Contact the lender directly before you escalate. Explain what happened, ask for a clear reason for the decision, and keep a record of the conversation. Stick to email or other written communication when you can, and note who you spoke with, when, and what they said. If the lender doesn’t address the issue, you could move forward with a complaint to a regulator or legal action.

You could also contact a lawyer directly to pursue your case. Contact a consumer protection attorney or legal aid organization to understand your options. Initial consultations are often (but not always) free.

Hard evidence could prove credit discrimination

You’re more likely to win a case alleging credit discrimination if you have hard evidence. Courts and regulators generally need explicit proof of guilt, such as emails or recorded phone calls that demonstrate the defendant's actions or words are clearly discriminatory and violate fair lending laws. 

To prove credit discrimination:

• Create a paper trail by holding onto documents and taking notes.

• Stick to text-based communication like email.

• Record phone conversations.

White House Updates What Qualifies as Discrimination

President Trump’s executive order Ending Illegal Discrimination and Restoring Merit-Based Opportunity aims to alter what qualifies as credit discrimination.

The goal is to make lending colorblind and data-based. Currently, the Equal Credit Opportunity Act prohibits lenders from using a person's protected characteristics (such as race or religion) in their lending decisions.  For example, a lender might be prohibited from unintentionally offering less credit to women.

An executive order can't change or overturn an existing law or regulation. In other words, this doesn’t give financial institutions a free pass to overlook fairness and compliance. 

The likelier scenario is that this executive order signals a big change in how lenders will be regulated. 

Even with possible regulatory changes, the fundamentals are still in place. Lenders still want you to prove you’re a safe bet. They still want to extend credit—it’s their business, after all. Make it easier for them to stamp yes on your application. The more solid your foundation, the better your odds of getting approved.

Looking for debt relief in Ohio or across the country? The first step is the most important one—learn more.