Credit Card Debt’s Mighty Grip on Black America
By Steven Barboza
Some ringing cash registers indicate an economy on the mend. Others signify nosedives into the black hole of debt for more and more African Americans.
Studies show that black people are shouldering a disproportionate burden of the nation’s credit card debt, and thus are among those consumers who contribute the most to credit card industry profits.
Several years ago, study data found that black cardholders who carry balances on their accounts are more than twice as likely as whites to pay high interest rates.
“About 15% of African Americans and 13% of Latino cardholders pay interest rates greater than 20%,” said Jing Jian Xiao, professor of consumer finance at the University of Rhode Island, who compiled a study in 2004 using data from the Federal Reserve and CardData, an online database of industry information. “Only 7% of white cardholders pay interest rates higher than 20%.”
Last month, another study, “Credit Card Ills,” which analyzed racial disparities in industry practices, reported that credit card companies are reaping billions of dollars in profits from the inability of black and low-income consumers to match their monthly incomes with their expenses.
The companies use a variety of practices to boost profits, from mailing out “pre-approved” credit cards to offering cards with zero-interest teaser rates that later shift to punitively high annual percentage rates (APRs) and excessive fees, the study notes. These offers can be tempting to barely solvent consumers during the aftermath of the Great Recession.
“Credit card companies have zeroed in on this struggling population because it contains the people most likely to revolve balances for the longest periods of time, representing the sweet spot of the market, below convenience card user but above the individual in bankruptcy proceedings,” notes Andrea Freeman, author of the study, the first analysis of racial disparities in legal scholarship.
Credit cards for these people and others serve as a “plastic safety net,” providing a means for people to fill a gap between falling incomes and the bills they must pay in order to survive financially, at least temporarily.
In the key findings of yet another study, nearly 60% of African Americans held a credit card, and nearly 84% of these cardholders carried a month-to-month balance in 2004.
Also, nearly one out of five card-indebted African Americans earning less than $50,000 was in debt hardship, meaning 40% of their income was being spent on debt service payments. In many cases, debt spiraled out of control for this population during the latest recession. The study was part of a series of briefing papers titled “Borrowing to Make Ends Meet.”
The study found that African Americans are more likely to fall victim to high cost financial services because many predatory lenders open offices and market aggressively in their communities, providing illusory solutions but contributing to worsening household finances.
One explanation offered for the widening debt gap between African Americans and whites is the wealth disparity among racial and ethnic groups. Just 10 years ago, African Americans held only 10 cents for every $1 of white wealth. Just five years ago, less than half of African American households owned their homes compared to three quarters of white households who enjoyed home ownership.
Today’s financial realities have resulted in two types of credit card users, according to Freeman, who teaches at California Western School of Law. “I identified one type as a ‘subsistence user,’ someone who relies on credit cards to pay her electricity and gas bills and to purchase necessities such as groceries and diapers. Without a credit card she lacks the means to support herself and her family because of stagnant real wages.”
“The other major type of credit card user, the ‘lifestyle user,’ can purchase basic necessities without borrowing, but uses credit cards to enhance her lifestyle, whether that means purchasing movie tickets, birthday gifts, or work clothing.”
Many cardholders get into financial trouble by making a series of charges that taken alone are hardly threatening but when combined can accumulate quickly into overwhelmingly large balances. Cardholders elect to pay via a revolving balance, yet wouldn’t dream of taking out a bank loan for the same amount.