Household debt is ubiquitous, but some forms of debt are riskier and more expensive than others. These include payday loans, credit cards, and auto loans. They can also include student loans. Households of color are often more likely to owe such debt than are white households. The associated costs and risks make it harder for them to build wealth at the same rate as white households.
Many forms of consumer credit are expensive and risky for borrowers. They come with relatively high interest rates. And, interest rates can often rise, especially in the case of credit cards. Families frequently use consumer debt to pay for living expenses due to a financial emergency, rather than to invest in the future. And, in the case of student loans, where people invest in their future, the investment is very uncertain. Many students can not finish their diplomas or may not get the careers they hoped for. At the end of the day, households still carry debt and face demands to repay that debt, even if income growth is lower than expected or income declines.
Consumer credit recovered fairly quickly during the pandemic. Federal Reserve data shows trends total debt as good as Consumer credit. Credit card debt, for example, hit a low of $ 981 billion in inflation-adjusted terms in March 2021, but again topped $ 1,000 billion in September 2021. That equated to 5.5 % of after-tax income, up from 4.9% in March 2021, but was still below the level of 6.6% at the end of 2019, before the start of the pandemic. Other consumer loans, including auto and student loans, stood at $ 3.3 trillion in September 2021, equivalent to 18.4% of after-tax income. This is not far from the record high 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. On the one hand, according to Federal Reserve data on household finances (see figure below). The gaps were particularly large when it came to payday loans in 2019 (see figure below). Almost six percent, 5.7%, of black households, 3.0% of Latinx households, and 3.7% of other or multiple-race households owed payday loans (see figure below) . In comparison, only 2.0% of white households did so.
Second, households of color owe larger amounts of installment loans relative to their income. The median ratio of installment loans to income in 2019 among households that owed such debt was 35.7% for black households, 28.1% for Latinx households, and 26.0% for households of other races. or multiple races. In comparison, it was only 22.6% for white households in the same year.
Third, consumer debt such as credit cards and installment loans represent a much larger share of the total debt of black households than that of white households. The most recent Quarterly data from the Federal Reserve on the distribution of household wealth shows that consumer credit accounted for 43.5% of all debt for black households, 28.9% for Latinx households and 26.7% for households of other races or of several races. It represented only 22.8% of the total debt of white households. The distribution of debt is skewed in favor of higher cost debt among households of color. This debt often does not help households access key assets such as real estate and business ownership.
Fourth, households of color have less assets to show for their debt. This is especially true for consumer debt relative to durable consumer goods, including cars. Black households owed more consumer loans than the value of all their consumer durables, as the ratio of consumer debt to consumer durables was 126.1% in September 2021. Likewise, households other races or multiple races owed more than the value of their consumer durables 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 pay their bills than does white households.
It 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 at 9.7% in September 2021 than that of black households (19.5%), Latinx households (25.0%) and other race households. or multiples (14.5%). White households tend to have more access to mortgage and real estate markets, for example. They can also access credit markets more easily for business loans. This makes it easier for white households than for colored households to invest and expand their wealth.
Household debt can provide a way to invest in key assets such as homeownership and businesses, but also a college education. Households also depend on debt to pay their daily expenses, especially when struggling with low incomes. Some debts can then help create wealth, while others, often more expensive, present significant financial risks to the future financial security of households. Yet the risks and costs of debt are unevenly distributed according to race and ethnicity. Households of color have more consumer debt, while white households have more access to debt such as mortgages that can help them increase their wealth.