Is Race a Factor for Credit Card Companies?

While blame for the credit crisis in America is being shuffled around to the feet of almost anyone involved in the industry—from government to bank to cardholder—the ultimate truth is that a problem so pervasive can’t be attributed to a single link in the credit chain. Lack of government regulation in the industry could definitely have contributed to the problem, as well as short-term profit motives without long-term planning by credit card companies.

The sad consequence, though, is that the ill effects of the problem may not be as equally shared as the blame. Studies have shown strong correlations between an increased number of subprime mortgage loans in a given neighborhood and a proportionally-high percentage of minority residents. Likewise, a new study from the Federal Reserve Bank of Boston suggests that African-American consumers have less access to credit than white consumers.

The study conducted by Ethan Cohen-Cole is titled “Credit Card Redlining,” and sought to determine ways to measure effectively how credit card companies might handle African-American consumers and white consumers differently. Like the subprime lending study on race, Cohen-Cole found that using the racial makeup of the neighborhood in which applicants lived offered the best results, since most credit card applications are completed online or via mail.

The second difficulty in the study was controlling for factors that might affect credit and skew the results by race: crime and home vacancy, for example, which tend to be higher in urban neighborhoods with large black populations, lead to decreased access to credit across neighborhoods.

Yet when controlling for these variables, the study found that racial minorities are given less credit than whites. Of course, the study found that if your credit history is weak, you won’t be given access to much credit regardless of race. The difference is found in those with unblemished and strong credit histories: racial minorities in this category were on average offered less credit than white consumers with similar credit histories.

Some 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.

Regardless of how accurate Cohen-Cole’s methods were, they highlight a problem that seems to be part of institutional practice in the lending industry. Previous studies found racial disparities in interest rate payments, as well as those targeted by fraud schemes.

However, these corners of the lending industry may not have the same widespread effect of credit card discrimination. Most Americans begin building their credit history by using credit cards, which means discrimination in this foundational stage can hinder them from developing a good credit score from the outset, a crucial factor in determining loan eligibility at a later date. Without the same chance to build a decent credit score as white consumers, black consumers will also be more likely to qualify only for subprime loans—a finding supported by previous studies as well.

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