A Study into African Americans’ Credit Card Debt Problem

Literature Review: A Study into African Americans’ Credit Card Debt Problem
Student Name
Department, University
Course Code: Course Name
Professor’s Name
Due Date
Literature Review: A Study into African Americans’ Credit Card Debt Problem
Background of the Literature Review
Among young customers, using credit cards has become more widespread over time. A credit card was owned by a significant share of first-year college students in 2009, with half of that population having four or more. The need for debt is growing as people get older and are in a transitional period of life. In order to make more significant purchasing decisions, like mortgage or auto loans, building credit is a crucial financial step. Borrowing cards are a versatile form of unsecured credit for those with low incomes that they can use to meet their high consumption needs and keep their finances stable without having to put up collateral. It is a serious issue, though, that young adults cannot adequately manage their credit and are frequently persuaded by pushy financial firms to enter into dangerous credit arrangements (Noel et al., 2019). The Credit Card Accountability Responsibility and Disclosure Act of 2009, passed in the wake of the economic recession, increased entry hurdles for young people by introducing financial protections for credit consumers (Coviello et al., 2022). Convenience, the ability to make repeated financial purchases, rewards programs, and credit history building are a few of the key benefits of using credit cards for purchases. Although the U.S. credit card usage scores appear to be race-neutral, they are actually racialized and wealthy-perpetrated with a number of discrepancies. This report evaluates and synthesizes the evidence concerning African Americans’ credit card debt problem.
Literature Review: A Study into African Americans’ Credit Card Debt Problem
According to Yakoboski et al. (2020), over 44 million African Americans in the United States (U.S.) account for 13% of the country’s total population. African Americans make purchases amounting to $1.2 trillion annually, thus reiterating that they impact the economy significantly. Yakoboski and colleagues further note that African Americans lag behind in financial wellbeing compared to the rest of the U.S. population, particularly Whites. The authors blame the trends on financial illiteracy among African Americans, thus suggesting the need to improve financial practices and capabilities via enhanced financial literacy to benefit the Black communities who earn low incomes. Weller and Hanks (2018) noted that African Americans have persistently had less wealth than their White counterparts, as shown in exhibit 1 below. According to them, racial differences exist concerning debt, with African Americans typically having more costly debt – including student debt, credit card debt, and auto loans – compared to their White counterparts. Compared to the preceding generation, credit cards have significantly increased in popularity for household financing due to stagnant household incomes and a steady fall in people’s purchasing power (Pugliese et al., 2021). According to Seamster (2019), debt is conceptualized as a shameful construct. In this way, White Americans do not consider their access to credit as an advantage, while African American households do not typically view their indebtedness as a structural injustice (Seamster 2019).
Exhibit 1: Income and wealth shares of leading 20% of income earners (Weller & Hanks, 2018).
A recent study by Goodstein et al. (2021) emphasizes the importance of credit access in smoothing consumption as well as facilitating massive purchases, including automobiles or a house. Ethnic and racial differences exist in the utilization of commercial bank credits (for example, through credit cards) as well as nonbank loans (for example, payday credits) across U.S. families (Goodstein et al., 2021). Accordingly, previous studies indicate that credit cards constitute the most typical approach that users create a credit history with the federal credit reference bureaus and ultimately become scorable (Brevoort & Kambara, 2017). Devoid of positive credit reputation due to credit card debts, African American households must meet their credit needs with more expensive credit forms, including nonbank credit services or bank overdrafts, which normally potentiates triple-digit annual percentage rates (APRs). Research also indicates less attention is paid to critical aspects of the African American household balance sheet – credit debt (McKay et al., 2022). Although previous analysis emphasized racial discrepancies in mortgages and student loans between African American and White households, recent research fails to illuminate the role of credit card debt in widening the wealth differential between the same households (McKay et al., 2022). Credit card debt is increasingly underappreciated as a racial wealth gap driver in America.
The capstone project objective is to determine how public safety nets like housing, growing health care expenditures, and higher education affect African Americans’ credit debt problem. In light of the preceding discourses, it is crucial to consider several potential causes for African Americans’ higher credit card appetite than White people. Education Loans contribute to the credit card debt problem among African Americans. According to recent research, the constant rise in education costs in the U.S. over the previous decades constitutes a paradigm shift public entity to an increasingly private expense affair that many households, including economically disadvantaged African American households, finance by seeking debt (Nuckols et al., 2020). In this context, African American scholars are more likely to seek debt financing to attend institutions of higher learning, where their education loan debts are higher than those of White university graduates. According to recent data from the Federal Reserve, individuals with higher learning levels were more likely to have credit cards and less likely to carry a balance from one month to the next, with similar patterns being seen across educational levels. Race and ethnicity also affect credit card usage. More than 90% of Asian adults owned a credit card, yet just 3 in 10 of them had a balance at some point in the previous year. Adults of color—Black and Hispanic—were more likely than people of other races or ethnicities to have credit card debt (Federal Reserve, 2022). Accordingly, the probability of young African Americans taking on debt to pay for college is higher compared to their white counterparts. Among those graduating with student loans, African Americans had a significant share of the balances, with thousands of dollars more debt than their white graduate counterparts (Beal et al., 2019). Therefore, African American households are disproportionately impacted by student loans, which creates an appetite for credit card debts and subsequent burdens compared to their counterparts from other racial groups (Beal et al., 2019).
Homeownership differential between African Americans and other racial groups in America contributes to the credit card problem among the former. Recent research indicates that African Americans demonstrate lower homeownership rates compared to their white counterparts, which could be attributed to racial asset inequalities (Brown & Carbone, 2019). According to the Survey of Consumer Finances, home ownership significantly contributes to household wealth. It is typically the most significant asset on any given household statement of financial position or, instead, the balance sheet. Nevertheless, the well-known racial discrepancies in the homeownership rate in American communities have curtailed the economic benefits accruing to African American households, thus augmenting the overall racial discrepancies in the capacity to create wealth. The discrepancies in homeownership between African American households and their White counterparts have escalated to their highest thresholds within the previous five decades since the Great Recession and the real estate bust. Accordingly, the American Community Survey indicates that the discrepancies escalated from 28.1% in 2010 to 30.2% in 2017. Due to the fact that their homeownership rate is 30% higher than that of white people, African Americans have disproportionately high credit scores (Choi et al., 2019). The foundation of...