The convenience of having a credit card has its advantages. It's much safer to use a credit card than to carry around wads of cash, especially if you're traveling. You can't rent a hotel room, a car or make airline reservations without a credit card. But when African Americans use credit cards as a crutch or substitute for cash is when they get into trouble. While credit cards provide many households with an economic safety valve to deal with income shortfalls and emergency expenses, this debt may often aggravate their financial distress rather than relieve it.
Credit cards have become Americans' common form of currency. Americans charge 1.5 trillion dollars per year on credit cards. The industry is the most profitable one in the U.S. with annual earnings in the $30 billion range. A single credit card issuer - MBNA - earned 1.5 times more profit than McDonalds in 2004, and Citibank's credit cards earn more profit than both Microsoft and Wal-Mart.
Credit card debt is one explanation for widening gaps between African American families and their White counterparts. Credit is a cornerstone of wealth creation. Lack of access to credit for those with low credit scores, or no credit whatsoever, is an important and growing problem. It is almost impossible to build wealth in America without credit.
While all America is propped up on credit card debt, minorities are most at risk of damaging their financial futures due to poor credit card management. African American households spend larger percentages of their incomes paying credit card and other high interest rates that enrich lenders. A survey of activities between 1998 and 2001 found that minority families added on debt at a rate far greater than they increased their incomes, thereby reducing the overall wealth-building power of every dollar they earned. Minority families also racked up more than twice the debt of their White counterparts.
Credit card debt has caused African American families to use critical financial resources to pay mounting monthly interest payments instead of saving or acquiring assets such as real estate. It has also caused long-term disadvantages for African Americans because of the way lenders assign interest rates and insurance companies set premiums. Financial companies base interest rates on credit scores that are calculated, in part, by looking at how people use their credit and whether they pay their debt on time. The amount of debt a person has in relation to the overall credit available to them counts toward their credit score as well. Above-average debt means lower credit scores, for which lenders charge higher interest rates. Carrying a lot of credit card debt hurts scores of African Americans significantly.
Unfortunately, most of the debt African Americans have accumulated is used for items that depreciate in value, such as cars, furniture, electronics, and appliances. This indicates that Black consumers use credit inappropriately — to stretch their incomes. Historic, and pervasive, redlining by traditional banks has left high-interest credit cards as one of the few easily accessible sources of loans for minorities. Robert D. Manning, author of "Credit Card Nation: The Consequences of America's Addiction to Credit," looked at how the credit card business has grown and noted that African Americans have been easy prey: "Lenders know that once they have you paying month-to-month, it's hard to break free. The sooner they have people in debt, the longer the revenue stream persists."
The plastic in your pocket can help as well as hurt you. Check out your own credit score. The average American credit score is around 692. If your score is lower, borrowing gets real tough. Work on improving your rating.
William Reed is a columnist with Black Press International.