By: Edward Wyckoff Williams
July 8, 2014
"I am invisible; understand," Ralph Ellison famously wrote, "simply because people refuse to see me."
He was speaking of the double consciousness that accompanied the burden of blackness in America more than 60 years ago. But according to Yale professor Frederick Wherry, this conundrum is not just social and political but also economic--and that sense of invisibility persists in the 21st century.
It may come as no surprise that in the nation's supposedly colorblind age, access to income, credit and financial solutions remains riddled with racial inequity--and those on the losing end are disproportionately African American.
According to the Policy Economic Research Council (pdf), approximately 54 million Americans are "credit invisibles"--which means that they engage in creditworthy activities, such as paying utility and phone bills on time, but are effectively invisible to credit agencies, which don't take into account those kinds of payments when determining credit scores.
And the result has harsh real-world consequences.
Renting an apartment, qualifying for reasonably priced homeowners and car insurance, getting a job if you're unemployed and securing a promotion if you're already working are all things that can depend on your credit score.
An equally disadvantaged group is "unbanked" --the 8.2 percent of U.S. households that don't have a checking or savings account and must rely on check cashers or prepaid cards, of the variety that are notoriously marketed in African-American and Hispanic communities. Another 20.1 percent are "underbanked": households that have a bank account but are still forced to use high-interest, subprime financial services, such as payday loans, to make ends meet.
More than 55 percent of black households are unbanked or underbanked, the highest of any racial or ethnic group, and this means that a majority of African-American families don't have access to affordable financial solutions.
Wherry believes that this is the social-justice issue of our time, but he says that not enough politicians, economists or media figures are talking about it.
"African Americans were supposed to benefit from the deregulation of banks under [President Ronald] Reagan. That didn't happen because of systemic, racially biased policies like redlining. Then it looked as if there would be great opportunities under [President Bill] Clinton for blacks to get into the credit system, but as the housing market expanded, African Americans became targets for subprime lenders," Wherry told The Root. "They were deceived like millions of Americans. But the difference is that black families were already at a historical disadvantage--so [they] had much more to lose."
Wherry explained that what makes it difficult to frame these conversations in a social-justice context is that our society considers creditworthiness a matter of individual responsibility. "The African-American community is being exploited, but the story that is told to them is that [they] deserve the higher costs of services because they've been irresponsible. They don't question the high [annual percentage rate], because they believe they had a hand in getting themselves into that situation. My research has found that's not true at all. If anything, they've been victims."
The Society for Human Resources Management reports that 60 percent of U.S. employers use credit checks as part of their screening process for job applicants. This is, in part, the reason many African Americans are still struggling to find work. And it also explains how credit invisibility and being unbanked or underbanked exacerbates existing racial bias in hiring and lending.
As African Americans are increasingly excluded from mainstream financial services, their options for employment and wealth creation through homeownership are exponentially decreased. Lost opportunities resulting from racially biased lenders and employers--which are difficult to quantify--further complicate matters.
Although the companies that calculate credit scores say they don't consider race in their formulas, and federal law prohibits it, studies show a persistent gap between the credit scores of black and white Americans. Data collected by the Federal Reserve before the mortgage crisis showed that less than 25 percent of African Americans had top-tier credit scores, compared with 65 percent of whites. Today the gap is even wider.
"When black parents die, we often inherit debt and financial obligations--not equity," said Wherry. And this "relational accounting" (pdf) is a subject that he says is rarely discussed within the black community--although almost everyone has a sibling, cousin, aunt, uncle or friend who bears the responsibility of providing a safety net for extended family members. "I have students who send money home as soon as they receive their loan checks," he said. "The stereotype is that blacks love to buy cars or designer clothes. The truth is, they are spending on basics to survive."
So what's the solution?
Last year, in a rare bipartisan effort, Reps. Keith Ellison (D-Minn.) and Mike Fitzpatrick (R-Pa.) introduced the Credit Access and Inclusion Act (H.R. 2538), which enables Americans to build more-accurate credit scores by allowing cable, phone and utility companies to report information to major credit bureaus. This would reduce the number of those who are credit-invisible from 54 million to 5 million.
Wherry said that we also need improved financial education--but workshops and seminars are inadequate because the lessons learned don't always translate to people's everyday lives: "Another option is to design products and services that align better with habits people already have. The incomes for this population are both low and volatile, fluctuating from month to month. These households are trying to save consistently but are doing so with instruments that don't help them very much."
But, he acknowledged, there is no "magic bullet."
"Right now, people who are underbanked are squeezed between the banks and the payday lenders without much in between," he said. "Low- and moderate-income families need more, not fewer, financial options."