New York, NY — African-American and Hispanic households are at greater financial risk and more likely to be in credit card debt than their white counterparts, according to a new report, Costly Credit: African Americans and Latinos in Debt, released today by the Economic Opportunity Program at Demos, a leading national, non-partisan public policy and advocacy group. The report analyzed and compared credit card debt and the forces driving credit card reliance in three ethnic/racial groups: African Americans, Hispanics and whites.
"Any meaningful attempt to explain the widening debt gap between Latino and African-American families and their white counterparts must take into account the larger social, cultural and economic forces driving credit card debt," says Javier Silva, Senior Research and Policy Associate for Demos and lead author of Costly Credit.
"There are still widespread inequalities in wealth and opportunity, by race, in the United States, and households of color are less likely to have home equity or savings as a safety net to handle unexpected expenses or a reduction in income," Silva continues.
"During the recessions of the early 1990s and 2001, households of color increasingly turned to high-interest credit cards and other forms of predatory lending in order to survive. Any income gains made during the boom years of the late 1990s were all but erased by the 2001 recession."
The underlying forces driving credit card debt for African-American and Hispanic households highlighted in Costly Credit include the effects of deregulation of the credit card industry, stagnant income growth, high unemployment levels, barriers to homeownership, lack of health insurance, and predatory lending practices.
Credit card data for the report was drawn from the Survey of Consumer Finances, a Federal Reserve survey of the assets and liabilities of American families; the years 1992 through 2001 were analyzed for Costly Credit. Other studies and data used in this report are cited in the briefing paper — part of the Demos Borrowing to Make Ends Meet series.
Among The Report's Key Findings:
* Regardless of racial or ethnic background debt hardship remained high throughout the 1990s for very low-and middle income families. Debt hardship is a key indicator of household financial health; a family is considered to be in debt hardship when monthly debt service payments equal 40 per cent or more of household income.
* While increasing numbers of Hispanic and African-American families gained access to credit cards throughout the 1990s, they were much more likely to carry a credit card balance than whites. For the year 2001, the last year data was available, the percent of cardholders carrying a balance stood at 84% for African-Americans, 75% for Hispanics, and 50%for whites.
* Hispanic and African-American families held lower credit card balances than that of white families throughout the 1990s but the growth of their credit card balances far outpaced that of white families in the latter half of the decade. Between 1998 and 2001, Latino households saw a 19% growth in credit card balances, African Americans stood at 10% and white households saw an 11% decrease.
* Because African Americans and Latinos experience higher unemployment rates, even during economic boom cycles, they are more likely to rely on debt to smooth out lower incomes.
* Health coverage trends during the 1990s reveal Latinos and African Americans are far more likely to be uninsured. Between 1992 and 2001, nearly a third of Hispanics and a fifth of African Americans had no health coverage.
* In 2001, the percent of African Americans and Latinos with zero or negative net worth stood at 30.9 percent and 35.3 percent--more than double the percentage of white households which stood at 13.1 percent.
* For a complete and extensive statistical breakdown of credit card access, balances and debt hardship by race/ethnicity please refer to the analysis detailed in the Costly Credit briefing paper.
"Compounding the problem of increased reliance on credit cards — primarily to bridge the gap between falling incomes and rising costs — African-American and Latino communities are aggressively, and deliberately, targeted by predatory lenders," states Silva. "Between 1993 and 2001, subprime loans — one of the most pernicious forms of predatory lending to low-income, predominantly African-American and Hispanic communities — grew from 2.4 percent to 13.4 percent. Refinancing loans in these same communities rose from 6.8 percent to 27.5 percent. One in five subprime refinance loans originated in 1999 entered foreclosure, and this trend has continued, unabated, into the new century."
Among The Report's Key Policy Recommendations:
Addressing Industry Practices
* Enact a Borrower's Security Act. This Act would restore responsible credit practices to the lending industry by extending fair terms to borrowers and prevent the capricious changes in rates, fees and account terms that currently exist.
* Combat Predatory Home Mortgage Lending. Congress must pass strong anti-predatory lending legislation to protect groups at risk from lenders and brokers selling sub prime home financing.
Addressing Economic Insecurity
* Expand Health Insurance. In 2003, well into the economic recovery, 45 million Americans were without health insurance. Large numbers of African Americans and Latinos who are uninsured are forced to borrow on high-cost credit cards to get medical care.
* Raise the Minimum Wage. The real value of the minimum wage has fallen over time. The new minimum wage should be indexed to inflation to retain its purchasing power.
* Bolster Unemployment Insurance. Job loss is one of the three most common precursors to bankruptcy. Many American workers are ineligible for unemployment benefits. States must expand coverage to more low-wage and contingent workers.
"While Hispanics and African Americans comprise an increasing percentage of the U.S. population — now nearly 25 percent--they share less and less of the wealth while being subject to increasingly usurious lending practices," says Silva. "This continued economic insecurity has serious implications for our shared future and prosperity as a country. Profound changes are needed immediately to address the problem of rising credit card debt and financial insecurity for all U.S. families."
To view the full report, Costly Credit: African Americans and Latinos in Debt, please visit: archive.demos.org.
Demos is a national, nonpartisan public policy and research organization based in New York.