Racial Disparities Evident in Credit Card Redlining
Residents of Black neighborhoods have significantly poorer access to credit card borrowing than residents of White areas, even if they have similar creditworthiness characteristics.
This is the conclusion of a recent working paper published by the Federal Reserve Bank of Boston. Author Ethan Cohen-Cole also suggests that “the observed differences in credit lines by racial composition of neighborhood are largely driven by issuer decisions rather than by demand.”
After controlling for the influence of such other place-specific factors as crime, housing vacancy rates, and general population demographics, the paper finds qualitatively large differences in the amount of credit offered to similarly qualified applicants living in Black versus White areas.
The paper’s principal observation is that “remarkably, in spite of identical scores and identical community characteristics, our individual in the Black neighborhood receives less consumer credit (e.g. fewer credit cards) than the individual in the White area. That is, in spite of the fact that both have been assessed to have similar risks of nonpayment, as determined by the credit score, the person living in the Black area has less ability to access credit. ”
The author identifies a pernicous effect of the lack of access to credit cards: “While credit card interest rates are exceptionally high compared to collateralized credit such as mortgages, they are nonetheless quite low compared to the growing payday loan market, where borrowers often go when other loan avenues are closed. Payday lenders often charge annual interest rates upward of 300%.”
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