While families of every race and ethnicity can struggle with credit card debt, a recent report is taking special notice of the challenges faced by the African-American middle class.
The report, co-authored by the NAACP and policy firm Demos, not only considered how low-to-moderate income black families are addressing their credit card debt, but also uncovered possible disparities in interest rates and collection practices.
Owing less than five years ago
First, there is good news. The report found the average credit card balance for black, middle-class families is now $5,784. That figure is down nearly a thousand dollars from the $6,671 owed by these households in 2008.
However, despite the reduction in debt, many families continue to turn to credit cards to pay for basic living expenses, a habit that could quickly result in increased debt. The study found 42 percent of surveyed black households have used their credit cards in the past year to pay for things such as rent, groceries or utilities.
While the number of African-Americans living off their credit cards is concerning, it is not a phenomenon unique to this group. The report notes similar percentages of Latinos and white households also report using credit cards to pay for basic needs.
Higher interest rates, more collector calls
Where African-Americans differ from their white counterparts is in the interest rates they pay and the debt collection calls they receive.
Despite having a lower average credit card debt, African-American households have interest rates that average nearly two percentage points higher than white households. The study found the average white household had $7,315 in credit card debt and are paying 15.8 percent interest. African-Americans, meanwhile, are paying average rates of 17.7 percent on their $5,784 debt. Latino households had the highest average interest rates, 17.9 percent on an average debt of $6,066.
Before too much is read into those interest rate differences, the study notes that each is within the survey's margin of error and could be statistically insignificant. However, this does raise the possibility that either African-Americans are either not being offered the best credit cards or are having difficulty locating low-interest cards.
Another difference between white and black households is the percent receiving collector calls related to their debt. While only half of white households say they have received calls from bill collectors related to their debt, 71 percent of African-American households say they've received such calls.
The difference may be attributed, in part, to the fact that 80 percent of white households change their credit card usage once they have been slapped with an increased interest rate because of a late payment. Only 62 percent of African-American households report changing their credit card habits under similar circumstances.
Three areas targeted for policy changes
At the conclusion of the report, Demos and the NAACP offer policy recommendations in three areas:
- Medical debt
- Financial regulation
- Credit scores
These areas were selected because they appear to pose particular concerns for African-Americans. For example, 40 percent of surveyed African-Americans said errors on their credit report contributed to their low credit scores.
In addition, the recommendations noted the success of the CARD Act of 2009. The report called for an expansion of federal regulations as a way to not only help African-Americans but also provide financial protection to low-to-middle-income households of all races.