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In the Red: The Challenge of Credit Card Debt for the African American Middle Class

Catherine Ruetschlin

Credit cards can be a useful stop-gap until payday, but when paychecks aren’t enough to cover the basics and balances roll over, credit cards become an expensive way to make ends meet.  Past research from Demos shows that 40 percent of indebted low- and middle-income households have used their credit cards as a plastic safety net when incomes, assets, and shrinking public programs did not afford enough to meet basic needs. Since racial disparities in other aspects of American society leave people of color with lower incomes and fewer assets, it’s no surprise that their experience in credit card markets differs from that of whites. But these differences persist in surprising ways, even when looking at households in similar income categories. In our new paper, The Challenge of Credit Card Debt for the African American Middle Class, Demos and the NAACP teamed up to explore the differential outcomes of African American and white households with credit card debt. We found that exclusion from economic opportunities has undermined the financial security of indebted African American households, and led to harsher consequences of debt.

Last year, we surveyed a representative population of households who carried credit card debt for at least three months in the 2012 Demos National Survey on Credit Card Debt of Low- and Middle-Income Households. The results, presented in our new paper co-authored with the NAACP, reveal that a lack of assets makes credit cards a central tool for African Americans financing investments in their future. For example, nearly all African American households in our survey who incurred expenses from starting or running a business continue to carry those debts on their credit card balance. That means higher costs of borrowing relative to other financing sources, putting African American entrepreneurs at a greater disadvantage than business owners with more assets to back their venture and perpetuating racial biases across markets from asset ownership to business success.

African American families also find fewer options for credit and less control over their terms of service. When comparing households of similar income we found that African American and white indebted households were equally likely to report having made late payments, but African American households were less likely to be able to switch to other financing mechanisms when faced with rising fees for cards where a balance went past due. And when the credit market dried up in the Great Recession, African Americans felt the pinch much more than whites, with more than half of African Americans seeing cards cancelled, limits reduced, or being denied a credit card.

Greater costs and less choice in borrowing becomes a barrier to opportunities outside of the credit card market as credit history gains importance even in areas unrelated to consumer finance. Employers rely on a swelling credit reporting industry to filter job applicants. Hospitals rely on them for determining billing procedures. Utility companies turn to credit history to assess the need for deposits before providing service. But disadvantages in labor and housing markets, translating to higher costs of borrowing, push through the legacy of racism from policies and practices throughout American history to the market outcomes of today. In our survey, indebted African Americans were far more likely to report having just fair or poor credit scores, while the vast majority of indebted whites report good or excellent scores.

The results of our survey indicate that racial disparities persist even in those institutions that we idealize as neutral, and that our current system of credit keeps a history of racial inequality alive. The good news is that the evidence also shows that credit market reform can improve financial freedom and have a positive impact on peoples’ lives. We found that the 2009 CARD Act eliminated some practices that harmed consumers and helped Americans pay down debt, but there is more work to be done to establish financial security for African American households. We can extend the successes of the CARD Act to ensure fair and accurate credit histories, establish equitable debt collection practices, and inhibit the spread of racial biases from decades-old policies into the market practices of today.