The credit system has a long history of inequity, particularly affecting Black Americans. A recent study by Varo Bank highlights the persistent disparities faced by our community in navigating the challenges of today’s economy. The Consumer Credit Watch survey, conducted in partnership with Morning Consult, reveals the financial habits and struggles of employed adults living paycheck-to-paycheck, shedding light on how they manage rising costs and increasing debt.
The impact of inflation on Black Americans
According to the study, 68 percent of Black Americans report being impacted by inflation, slightly lower than the general population at 76 percent. However, the barriers to credit approval are more pronounced for Black Americans, with only 25 percent consistently approved for credit compared to 35 percent of the general population. Despite these challenges, Black Americans report slightly more financial stability, though they are less likely to apply for credit or loans. Notably, 60 percent of Black Americans express a desire for greater access to credit, a figure significantly higher than the 43 percent of the general population.
Credit usage and essential expenses
As inflation continues to strain living expenses, Black Americans are more likely to rely on credit for essential purchases such as groceries and bills. The study highlights that only 27 percent of respondents believe the credit system is fair, and a staggering 69 percent of those living paycheck-to-paycheck carry debt, with an average amount of loans denied totaling $10,455. These findings underscore the ongoing challenges faced by Black Americans in accessing and utilizing credit, while also pointing to broader systemic issues within the financial landscape.
Understanding credit scores
A credit score is a three-digit number that reflects an individual’s creditworthiness, calculated based on their credit report, which includes payment history, outstanding debts and other financial behaviors. Credit scores typically range from 300 to 850, with higher scores indicating better credit management. The two primary scoring models are FICO and VantageScore, with FICO being the most widely used, employed by 90 percent of lenders.
Factors influencing credit scores
Payment history: Accounts for 35 percent of your score.
Credit utilization: Represents 30 percent of your score; keeping this ratio below 30 percent is ideal.
Length of credit history: Longer histories can positively impact your score.
These factors play a crucial role in securing loans, credit cards or mortgages, affecting the terms and interest rates offered. Higher scores typically result in lower rates, while lower scores may lead to higher rates or even loan denial.
Discrimination in credit access
Despite the outlawing of redlining, a discriminatory practice that historically barred Black Americans from securing mortgages, remnants of this biased system persist today. Studies indicate that minority applicants, particularly African Americans and Latinos, face higher rejection rates for mortgages compared to their white counterparts. For instance, a 2019 study from the University of California, Berkeley, found that accepted African American borrowers pay significantly higher interest rates on home loans, costing them an estimated $765 million annually in extra payments.
Improving credit scores: A path forward
Improving credit scores is essential for financial mobility. Here are several strategies Black Americans can adopt to enhance their credit over time:
1. Pay bills on time
Payment history is the most significant factor affecting credit scores. Setting up automatic payments or reminders can help ensure timely payments.
2. Reduce credit card balances
Keep your credit utilization below 30 percent. Paying off credit card balances in full each month can improve your score and reduce interest payments.
3. Avoid opening too many new accounts
While a mix of credit types is beneficial, opening too many accounts in a short period can negatively impact your score.
4. Review your credit report regularly
Check your credit report for errors at least once a year. Disputing inaccuracies can help improve your score.
5. Become an authorized user
Being added as an authorized user on a trusted friend or family member’s credit card can boost your score through their positive payment history.
6. Address delinquent accounts
Work with creditors to negotiate payment plans or settle debts, which can positively affect your credit report.
7. Financial education and resources
Invest time in learning about credit management. Resources and workshops can provide valuable guidance.
8. Stay patient and persistent
Improving your credit score is a long-term process that requires consistent effort. By following these steps, Black Americans can gradually enhance their credit scores, leading to better access to loans and financial opportunities.
While the journey to improved credit may be challenging, it is a necessary step toward achieving greater financial stability and success for Black Americans. By understanding the credit system and taking proactive steps, we can work towards breaking down the barriers that have historically limited our access to financial resources.
