Without access to credit, ex-cons may return to lives of crime

Every week, more than 10,000 prisoners are released from U.S. prisons and begin the long process of reintegrating into society.

For many, a successful reintegration will occur only if they can access the types of credit commonly used by all American citizens, such as credit cards and auto loans. For those unable to borrow, prospects for successful re-entry fall and recidivism risks rise. That’s bad for all of us.

{mosads}Lack of access to credit can push former inmates into poverty traps and cycles of criminal behavior that hurts us all, but there are solutions that can change that. 

Some estimates suggest a majority of former inmates engage in criminal activity after their release. An oft-cited reason is the hard time former inmates have in finding employment. That is no doubt a serious problem and one that must be addressed. However, special attention needs to be paid to a challenge that receives little: the hurdles they face in obtaining credit. 

The crux of the issue for former inmates is that getting locked up typically hurts their credit scores. It’s not that credit bureaus specifically knockdown scores due to incarceration. The problem is, for obvious reasons, it’s difficult to repay loans or satisfy other debts while behind bars, so credit defaults and delinquencies pile up.

The negative financial effects continue even after release, as former inmates face severe discrimination in the labor market. Consequently, former inmates face significant impediments to accessing credit. 

But here is the paradox: Without credit, such individuals face myriad financial difficulties, from not being able to afford transportation or a place to live to falling victim to predatory lending and even homelessness.

Under such conditions, it is harder to get a job or make positive societal contributions. And more worrisome, such former inmates risk backsliding into criminal conduct. 

In a recent study, my coauthor and I found that former inmates are much less likely to have mortgages or auto loans than non-incarcerated individuals (14 and 24 percentage points lower, respectively), and their average credit scores are about 50 points lower.

Moreover, within the former inmate population, those experiencing sharper drops in credit availability are more likely to engage in future criminal activity: For each thousand dollars of available credit card limit lost, recidivism increases by 1.4 percentage points.

Accordingly, a history of incarceration and lack of access to credit creates credit-driven crime cycles for this population. 

Yet, after accounting for credit history and income, former inmates are less likely to default on loans than individuals who have never been incarcerated.

Because former inmates present lower credit risks, lenders extend former inmates slightly more loans, albeit not nearly enough to overcome a lending contraction driven by low credit scores.

This does not mean that instances of discrimination in lending against former inmates do not happen. These, however, appear to be the exception rather than the rule. 

How can former inmates present lower credit risks? Consider any borrower with an unfavorable credit history; that person has demonstrated an inability or unwillingness to repay loans granted.

A responsible borrower, however, likely retains a responsible financial mindset even in the face of inability to repay due to events such as natural disaster incidence, accidents, illnesses, job loss or incarceration.

{mossecondads}Lenders can use knowledge of such special circumstances to protect or improve their profits. For example, during hurricanes Irma and Maria, and more recently during the government shutdown, some lenders voluntarily initiated payment deferments for affected borrowers because they were confident their borrowers would make repayment a high priority.  

Unfortunately, reductions in credit scores caused by lower income and defaults while in jail or prison are not easily remedied. Lenders cannot readily distinguish the real reason behind a default.

Proper solutions to this dilemma need to be developed together with the affected communities and the organizations that help foster re-entry.

These solutions could include a combination of providing re-entry support and education to formerly incarcerated borrowers, deferments similar to those provided in student loans or during natural disasters, shorter times for defaults to be erased from credit files or even freezing-up their credit while incarcerated.

Carefully considering credit within the discussion of criminal justice reform may provide an important avenue for improving former inmates’ chances of successfully re-entering our society — all of which can help reduce the overall rate of crime. That makes banking on former inmates a worthy investment for all of us.

Carlos Fernando Avenancio-León is an assistant professor of finance at Indiana University — Bloomington and a researcher at the Golub Center for Finance and Policy at the MIT Sloan School of Management. He studies the impact of financial markets on disadvantaged communities.