What accounts for racial and ethnic differences in credit use?

Abstract

Racial and ethnic differences across U.S. households in use of bank credit (e.g., credit cards) and nonbank credit (e.g., payday loans) are striking. We examine whether household characteristics and residential location can explain these differences. We use a novel dataset with information on previously unexplored factors, including income volatility, subjective attitudes about banks, geographic proximity to financial providers, and neighborhood population characteristics. We find that much of the raw disparities in credit use are attributable to observable household characteristics. Accounting for neighborhood population characteristics meaningfully reduces the disparities further. However, the residual racial and ethnic disparities remain large in magnitude. We show these disparities are not likely attributable to unobserved differences in households' family background, financial literacy, subjective attitudes, or credit scores. Instead, they are most likely attributable to unobserved supply‐side factors, such as racial and ethnic differences in households' exposure to marketing. We conclude with implications for policy.

Banking the Unbanked Spurs Payday Loan Usage among Black Households

“…There is mounting evidence that racial minorities are more inclined to use AFS (Baradaran 2015;Caplan et al 2017;Charron-Chénier 2020). Even after accounting for variables such as socioeconomic status, accessibility to financial institutions, and neighborhood demographics, Black households are found to be less likely to rely solely on bank credit and more likely to turn to nonbank credit sources compared to white households (Goodstein et al 2021).…”

“…Alternative Financial Services (AFS), such as nonbank check cashing, pawn shop loans, and payday loans, provide financial resources typically in small amounts but at higher costs than traditional consumer credit. Excluded from mainstream financial markets, unbanked households disproportionately rely on AFS (Charron-Chénier 2020;Faber 2019;Fonseca 2023;Goodstein et al 2021). Although AFS can help in emergencies, they lead to a higher debt burden for these households due to their costly charges (Dwyer 2018).…”

Income and the CARD Act’s Ability-to-pay Rule in the US Credit Card Market

“…Dettling and Hsu (2021) find that higher minimum wages lead to higher credit limits among lower-income cardholders. Understanding differences in credit access and credit limits among consumer groups remains important: Black and Hispanic consumers are less likely to receive credit card offers (Firestone 2014;Goodstein et al 2021), while most differences in credit limits between male and female cardholders are explained by observable differences in, for example, income and employment (Blascak and Tranfaglia 2023).…”