Household debt is ubiquitous, but some forms of debt are riskier and costlier than others. These include payday loans, credit cards and car loans. They can also include student loans. Households of color often are more likely to owe such debt than is the case for White households. The associated costs and risks make it harder for them to build wealth at the same rate as White households do.
Many forms of consumer credit are costly and risky for borrowers. They come with relatively high interest rates. And, interest rates often can increase, especially in the case of credit cards. Families frequently use consumer debt to pay for current expenses because of a financial emergency, rather than to invest in the future. And, in the case of student loans, where people make an investment in their future, the investment is highly uncertain. Many students may not complete their degrees or may not get the careers that they had hoped for. In the end, households still carry a debt and face demands to repay that debt, even if income growth is less than expected or incomes drop.
Consumer loans have recovered rather quickly during the pandemic. Federal Reserve data show trends in total debt as well as consumer credit. Credit card debt, for instance, hit a low of $981 billion in inflation-adjusted terms in March 2021, but exceeded $1 trillion in September 2021 again. This equaled 5.5% of after-tax income, up from a low of 4.9% in March 2021, but was still below the level of 6.6% at the end of 2019, before the pandemic started. Other consumer credit, especially car and student loans, amounted to $3.3 trillion in September 2021, or the equivalent of 18.4% of after-tax income. This is not far below the record of 18.9% in December 2019. Many households borrowed during the pandemic to help them pay their bills.
Households of color tend to have more consumer debt than White households do. For one, Black, Latinx households and households of Other or multiple races are more likely than White households to owe payday loans, credit card debt and installment credits, mainly car and student loans, according to Federal Reserve data on household finances (see figure below). The gaps were especially large with respect to payday loans in 2019 (see figure below). Close to six percent, 5.7%, of Black households, 3.0% of Latinx households and 3.7% of households of Other or multiple races owed payday loans (see figure below). In comparison, only 2.0% of White households did.
Households Of Color Have More Consumer Debt
Calculations Based on Federal Reserve, Survey of Consumer Finances
Second, households of color owe larger amounts of installment credits relative to their incomes. The median ratio of installment loans to income in 2019 among those households that owed such debt was 35.7% for Black households, 28.1% for Latinx households and 26.0% for households of Other or multiple races. In comparison, it was only 22.6% for White households in the same year.
Third, consumer debts such as credit cards and installment loans make up a much larger share of total debt for households of color than for White households. The most recent Federal Reserve quarterly data on household wealth distribution shows that consumer credit made up 43.5% of all debt for Black households, 28.9% for Latinx households and 26.7% for households of Other or multiple races. It amounted to only 22.8% of total debt for White households. The distribution of debt is skewed towards higher-cost debt among households of color. This debt often does not help households gain access to key assets such as real estate and business ownership.
Fourth, households of color have fewer assets to show for their debt. This is especially true for consumer debt relative to consumer durables, including cars. Black households owed more in consumer loans than all of their consumer durables were worth as the ratio of consumer debt to consumer durables was 126.1% in September 2021. Similarly, households of Other or multiple races owed more than their consumer durables were worth with a ratio of 103.3%. This ratio was 70.1% for Latinx households and 51.5% for White households (see figure below). Households of color need to rely more on consumer debt to help them pay their bills than is the case for White households.
Consumer Debt Exceeds Consumer Durables For Black Households
Calculations Based on Federal Reserve, Distributional Financial Acounts
This also means that White households have more opportunities to use debt to invest in assets and build wealth. Their ratio of total debt to total assets was much lower with 9.7% in September 2021 than that for Black households (19.5%), Latinx households (25.0%) and households of Other or multiple races (14.5%). White households tend to have more access to mortgage and housing markets, for instance. They can also more easily access credit markets for business loans. This makes it easier for White households than for households of color to invest and expand their wealth.
Household debt can provide a means to invest in key assets such as homeownership and businesses, but also a college education. Households also rely on debt to pay for current expenses, especially when they struggle with low incomes. Some debt can then help to build wealth, while other, often more costly debt poses large financial risks to households’ future financial security. Yet, the risks and costs of debt are unevenly distributed by race and ethnicity. Households of color owe more consumer debt, while White households have more access to debt such as mortgages that can help them grow their wealth.