Is Race a Factor for Credit Cards, Too?
Not long ago, Total Bankruptcy reported on a study showing that expensive subprime loans were offered more frequently to racial minorities than to white borrowers. Unfortunately, a new study from the Federal Reserve Bank of Boston shows that, all other factors being equal, black Americans have access to less credit (in the form of credit cards) than white Americans.
Earlier studies have highlighted racial disparities in various areas of lending: a Consumer Federation of America report evidently found that black Americans pay an average interest rate of 7.5% on car loans while the rest of Americans pay only 6%, and Hispanics and blacks are more often targeted by fraud schemes than whites, according to a study by the Fair Trade Commission.
Though any sign of discrimination in the credit industry is troubling, disparities in credit card access can be seen as especially so, according to some experts. Many Americans begin building their credit history by using credit cards. Without adequate access to plastic, people may not be able to develop a good credit score, which means that they'll be less attractive to lenders, which means they'll likely get less favorable or subprime loans.
Clearly, these results matter.
The study, "Credit Card Redlining," was conducted by Ethan Cohen-Cole and sought to determine what - if any - difference existed in the ability of whites and blacks to obtain credit in the form of credit cards. Because most credit card applications are completed through mail or on the Internet - meaning that individual applicants cannot be seen by card issuers at the time of application - Cohen-Cole focused on the racial makeup of the neighborhood in which applicants lived.
His results showed that those in predominately black neighborhoods are offered less credit than those in predominately white neighborhoods. According to his paper, Cohen-Cole attempted to control for factors like crime and home vacancy, which tend to be high in black urban neighborhoods and which can lead to decreased access to credit for reasons unrelated to race.
Even with the controls in place, the study found, racial minorities are given less credit than whites.
Specifically, the study showed that, if your credit history is weak, you won't be given much credit no matter what race you are. But if your credit history is strong, you're likely to be offered less credit if you're a racial minority.
Writers on the Personal Finance Blog have questioned the effectiveness of Cohen-Cole's "control" efforts. That is, not everyone is so sure a study can successfully eliminate the influence of high crime rates on a neighborhood.
Still, whether or not the findings of "Credit Card Redlining" are 100% accurate, they draw attention to the serious and growing problem of race disparity in the lending industry.