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 percent of African Americans and 13 percent of Latino cardholders pay interest rates greater than 20 percent,” 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 percent of white cardholders pay interest rates higher than 20 percent.”
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 percent of African Americans held a credit card, and nearly 84 percent 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 percent 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.
Credit card issuers have thrived in this financial terrain, creating lucrative schemes to accumulate profits off fees charged to those who string out payments over long periods of time, often several years.
Freeman’s study points out that the credit card industry is “the most profitable financial service in the United States.” Though credit card use has been declining in recent months, it still approaches $1 trillion in transactions per year.
Based on Census Bureau findings, there were an estimated 181 million cardholders in the U.S., according to CreditCards.com. Each cardholder has an average of 7 credit cards.
Generally banks issue credit cards through issuing agencies such as American Express and MasterCard. The top 10 credit card issuers control 90 percent of the market.
In the U.S. alone there were 48.9 million American Express cards, 171 million MasterCard credit cards, 123 million MasterCard debit cards, 269 million Visa credit cards, and 397 million Visa debit cards.
Eighty percent of American households possess credit cards. Worldwide consumers carry more than 1 billion Visa cards – 1 for every 7 people on earth.
More than one in three African Americans (35 percent) reported having at least two credit cards in 2009. Over 90 percent of black families earning $10,000 to $24,999 accumulated credit card debt.
They, along with other Americans, cherish the ability to charge freely. Credit and debit card fraud is the No. 1 fear of Americans during the current financial crisis, according to the Unisys Security Index. In fact, concern about fraud supersedes concern for terrorism, computer and health viruses, and even personal safety.
In 2008, there were 9.9 million victims of identity fraud in the U.S., and the total annual fraud was $48 billion.
In December, Americans carried an average of $4,284 on credit card statements, according to Experian, a credit monitoring company. The city with the highest card debt was San Antonio, with $5,177 due on average, followed by Jacksonville, Florida, at $5,115.
Nationally, 51percent of blacks admitted to not paying all of their bills on time, while 26percent of all Americans reported this.
The penalties for default are high. In January of 2010, the national average default APR stood at 27.88percent, and the mean APR was 28.99percent.
This morning, the national average APR stands at 14.66 percent. For consumers with bad credit, the average APR is 23.95 percent.
Economist Thorstein Veblen posits that credit card companies are purely parasitical, charging numerous fees and penalties amounting to over $90 billion in revenue each year. According to a BCS Alliance study, credit card companies rake in profits of $30 billion each year. Penalty fees alone added up to some $20.5 billion in 2009, according to industry consultant R.K. Hammer.
Credit card companies exploit consumer whims and the lure of cross-class lifestyles by featuring celebrities in advertisements and by pushing certain experiences as fundamental to the American way — experiences that are “priceless” regardless of the cost, according to Freeman.
To woo subsistence users, credit card companies conduct massive mailings of pre-approved cards, preying on low-income people’s fears that they may not be credit-worthy.
“Many blacks have internalized stereotypes that lead them to believe they have bad credit when they do not,” Freeman pointed out, “and this leads black consumers to agree to bad terms and conditions in credit card agreements without investigating the possibility of finding a card with better terms.”
She added: “Consumer protection is necessary to ensure equitable access to credit, reasonable rates and fees, and nondiscriminatory lending.”
Many opt for credit cards in part because cash now carries a stigma of association with criminality and poverty, whereas the use of a credit card “confers privilege that can overcome class or racial discrimination,” Freeman said.
A card deemed by CNNMoney to be among the nation’s “credit cards from hell” due to its exorbitant rates is the First Premier Bank MasterCard, which has an APR of 59.99 percent and fees of more than $120 a year.
Even though there’s an over-saturation of credit cards in the U.S. market, there are 8 billion solicitations for new accounts each year, many of them dangling zero interest rates to unsuspecting consumers. These rates can explode into high annual fees after a set period of time.
Debt disparities between African Americans and whites is attributable in part, “Credit Card Ills” finds, to racial discrimination by credit card issuers in the form of “redlining,” the practice of varying credit card contract terms based on the applicant’s zip code and other signifiers of race, such as names and appearance.
Card issuers insist they do not discriminate based on race. In fact, federal law does not allow credit issuers to inquire about an applicant’s race or ethnicity. Betty Riess, credit card spokesperson for Bank of America, told the Atlanta Post: “In general we base lending decisions on stability, ability and willingness to pay.”
“In accordance with federal law, such as the Equal Credit Opportunity Act we don’t discriminate on the basis of race, color, religion, national origin, sex, [and] marital status.”
In 2006, however, the Boston Federal Reserve Bank published a study revealing significant differences in credit card terms based on the racial makeup of the users’ neighborhoods. The practice of redlining later was associated with the subprime mortgage crisis, which kicked off the latest recession.
Relatively little has been done to shield groups from “price discrimination” by firms that charge higher APRs to late-payers who revolve balances, a practice that adds billions to companies’ profits, helping to make credit card services a lucrative financial service. The 2009 CARD Act imposed significant limitations on industry practices, including prohibiting the use of universal default, which previously allowed a change in credit score to lead to increased interest rates on all of an individual’s credit cards.
But the act does not address racial debt disparity.