Survey Finds Racial Gap in Access to Credit

Inside Subprime: June 3, 2019

By Lindsay Frankel

A recent survey conducted by Morning Consult and CNBC found disparities in access to credit between white and black respondents. While 70 percent of white adults are carrying a credit or charge card, only 56 percent of black adults have a card on hand. 2,200 adults were surveyed between May 3rd and 5th, and the survey has a 2 percentage point margin of error.

The results are concerning because credit cards are one of the cheapest options for credit, helping people avoid more costly methods of borrowing when faced with emergencies. They’re also useful for building credit, which gives consumers access to lower-cost loans and insurance premiums. Credit score can even impact a consumer’s ability to rent an apartment or get a job.

“Basically, credit cards are essential to modern life,” said Andrea Freeman, a law professor at the University of Hawaii at Mānoa who is well-versed in consumer credit topics. “There are so many things you aren’t able to do without a credit card, like renting a car, buying an airplane ticket, etc.”

A recent report from the Federal Reserve found that 27 percent of Americans wouldn’t be able to cover an unexpected $400 expense without borrowing or selling something, and 12 percent said they wouldn’t be able to manage the expense at all. For those who need to borrow to cover an emergency, having a credit card can make the difference between staying on top of bills and falling into a debt trap>. That’s because people who lack access to credit often turn to payday loans, which have exorbitant interest rates reaching 400 percent on average. While these short-term loans are advertised as quick fix solutions for emergency expenses, they often exacerbate financial fragility.

Not having access to a credit card also precludes consumers from accessing other opportunities. “Whatever your first credit is, it really has an impact on the types and cost of credit you have access to going forward,” said Katherine Lucas McKay, a program manager at the Aspen Institute’s Financial Security Program. “Payday loans or other personal loans, that kind of debt puts you on a very different trajectory.”

For those who don’t own credit cards, the top cited reasons were a preference for other forms of payment and a desire to stay out of debt. Catherine Ruetschlin, an economics professor at the University of Utah, noted that this is likely due to black adults’ lower level of financial stability, which may make them more fearful of taking on a line of credit. There’s also some evidence that redlining still exists in the industry.

“What the research reflects is the fact that bad credit card terms usually go to people of color, so when they get into a contract with the credit card company, they are getting a bad deal,” she said. “So it makes more sense to use another payment method.”

Using credit cards responsibly opens the door for more financial opportunities and correlates with greater fiscal responsibility, the survey found. Credit card users were 24 percentage points more likely to stay on top of their bills and 22 percentage points more likely to monitor their accounts for accuracy.

But while a recent proposal would curb predatory lending, few solutions have addressed the racial gap in access to credit. “Opening up low-cost access to credit for individuals who may have been denied access to credit and need it would be a better place to start,” said Ruetschlin.

Learn more about payday loans, scams, and cash advances by checking out our city and state financial guides, including Illinois, Chicago, Florida, Ohio, Texas and more.