Limitations of Combining Hispanics and African Americans for Analysis of Credit Problems

Article excerpt

This study uses a combination of six Survey of Consumer Finances data sets to examine whether factors affecting credit delinquency differ by the racial/ethnic identity of households. Hispanic households are less likely than white households and white households are less likely than African American households to be delinquent. Our full model with interaction terms shows that the effects of financially adverse events, financial buffers and debt burden on the debt delinquency differ across racial/ethnic groups. Combining African American and Hispanic households into one racial/ethnic minority group as previous studies have done can be problematic.

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Attention to racial/ethnic minorities' credit acquisition dates back at least to the 1970s (Canner and Smith 1991). Public policy goals have included increasing racial/ethnic minorities' access to credit by eliminating discrimination (Anderson and VanderHoff 1999), and redlining and racial/ethnic preference in credit lending have been investigated (Canner, Gabriel, and Woolley 1991). Racial/ethnic differences in borrowing opportunities and access to credit have been also discussed in empirical literature (e.g., Anderson and VanderHoff 1999; Munnell et al. 1996; Scharfer and Ladd 1981; Tootell 1996). Financial innovation has relaxed credit constraints of households and has provided affordable and easily accessible credit to most Americans (Greenspan 1997). As a result, it has been much easier for households traditionally constrained by the credit market, including racial/ethnic minorities, to take on debt and consume more than income (Lyons 2003).

With increases in credit usage of racial/ethnic minorities, higher rates of debt payment problems by African Americans and Hispanics have continued and constitute the most consistent finding across previous studies (e.g., Anderson and VanderHoff 1999; Berkovec and Gabriel 1995; Canner, Gabriel, and Wolley 1991; Getter 2003; Godwin 1999; Sullivan and Fisher 1988; Volkwein et al. 1998). The default rate for African American households was significantly higher than that for white households, even after controlling for household characteristics (Anderson and VanderHoff 1999). African Americans were also twice as likely to lose their homes due to foreclosures as whites (Warren and Tyagi 2004). More recently, African Americans and Hispanics suffered excessively in the subprime crisis (Rivera et al. 2008).

Rising household debt payment problems are a concern since they influence other aspects of household finances negatively. Late debt payment is recorded on credit reports, often resulting in lower credit scores. These credit reports are then used to determine the level of risk associated with most loans or insurance. Household debt payment problems can affect access to credit or homeownership. Racial/ethnic minorities without the economic cushion provided by household wealth face severe economic hardships due to household debt problems. In addition, prospective employers may use credit reports in choosing between job candidates (Manning 2001; Scott 2005).

The household credit literature has long suggested that there exist racial/ethnic disparities in debt payment performance. Nevertheless, a rigorous analysis of payment performance with attention to borrowers' race/ethnicity is lacking. Previous studies on this issue are limited in two aspects. First, most previous studies combined racial/ethnic groups, especially African American and Hispanic households and then compared these to white households or perhaps a combination of white and "other" households. Combining African American and Hispanic households has been done presumably because the number of credit problems of each racial/ethnic group for any single survey year used in those studies is relatively low, although as Lindamood, Hanna, and Bi (2007) noted, many authors have not offered explanations for combining racial/ethnic groups. …