The Multigenerational Debt Trap
Low-income families often accumulate debt and suffer poor credit ratings as they try to make ends meet. Unfortunately, and unfairly, the children of those families, as adults, all too often also end up with poor credit solely because of their family’s past borrowing.
The median debt on credit cards for a low-income family is over $1,000, for auto loans it’s about $10,000, for student loans it’s over $15,000 and the median mortgage debt approaches $100,000. Whether it’s taking on a mortgage to raise kids in a safe neighborhood with a good school, buying a reliable car to get to work and bring their children to soccer practice, dealing with unexpected medical costs, providing childhood experiences that every parent, by force of nature, wants for their children, or providing decent clothes and food — the set of needs sometimes outstrips parents’ weekly paychecks. The challenge doesn’t necessarily end when the children become adults as parents dig out from the costs of raising them.
There are times when all these costs require borrowing beyond parents’ conventionally available credit. This is particularly a problem for parents in marginalized and low-income communities for whom access to credit can be unjustifiably constrained and who are more vulnerable to predatory lending practices. One way low-income parents address the challenge of obtaining the credit they need is by, either on their own or on the advice of a predatory lender, borrowing in a child’s name.
The problem when this happens is that the children, when they get to the point in life where they apply for credit, find out that they have low credit ratings — either because of the amount of debt their parents took out in their name, or because of late payments or other bad marks on the credit history. Even if the debt is fully paid, the low credit ratings can persist for years — despite the borrowing that caused it saying nothing about the child’s creditworthiness.
There is recourse for this with the credit agencies. The problem is that to raise the issue with the agency requires children subjecting their parents to criminal liability for what is technically fraud. To get the rating fixed a formal police report may be required. Even the standard form completed to correct credit ratings for those whose name and credit was used when they were minors, which is ostensibly easier than when the credit was obtained once someone is 18, requires the signing of an acknowledgement that they “understand that this declaration or the information it contains may be made available to federal, state, and/or local law enforcement agencies for such action within their jurisdiction as they deem appropriate.” Most children don’t want to criminalize their parents. So they suffer the consequences for the inherited bad credit for years.
This problem isn’t new, but it hasn’t been solved. When the press covers it they describe the least sympathetic situations. That’s not surprising, the only time this gets into the public eye is when children are bitter and angry and go public. Anecdotally, it is far more common that parents have borrowed in their children’s name for necessities or things that every parent would want for a home with children — not drugs or luxuries.
To break cycles of poverty and aspire to build generational wealth, policy intervention is needed. Children should be able to get their credit rating corrected if either they were minors when the debt was incurred or have a statement from their parent that the debt was incurred without the child’s knowledge. If the debt has been paid, this should all be confidential and not usable for criminal action. It is not fair that children from wealthy families inherit wealth they didn’t earn while the children of low-income families inherit credit ratings they don’t deserve.
