Without access to credit, ex-cons may return to lives of crime – Carlos Fernando Avenancio-León

Carlos Fernando Avenancio-León, Researcher, Golub Center for Finance and Policy, MIT Sloan School of Management

From The Hill 

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.

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.

Read the full post at The Hill.

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.

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