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Not All Debt Is Created Equal: Costlier and Riskier Debt with Less Assets Hinders Wealth Building for Black Households

It can be good to have some debt, as debt can actually help build wealth. But it all depends on the type of debt. Other debt can pose a major financial risk to your financial security. Black households are burdened with risk debt, hindering their ability to grow their wealth.

African-American families are weighed down by heavy debt burdens. Black households owed $8,554 on average in consumer debt in September 2019. White families carried a lot more consumer debt on average with $32,838, but they also have many more assets such as cars to offset that debt and higher earning power. On top of this, Blacks hold riskier debt.

Photo by Tima Miroshnichenko from Pexels

Risky debt, which comes with relatively high interest rates, includes payday loans, credit cards and car loans. It can also include student loans. And, Black households are more likely to owe such debt than is the case for white households. Carrying this type of debt makes it harder for Black households to build wealth at the same rate as white households do.

Blacks tend to owe payday loans, credit card debt, installment credits and student loans more than their white peers, according to Federal Reserve data on household finances. Nearly six percent, 5.7 percent, of Black households owned payday loans; just 2.0 percent of white households did.

Looking at installment credits relative to income, the median ratio of installment loans to income was 35.7 percent for Black households, versus 22.6 percent for white households in 2019. Installment credit is a loan for which you repay with fixed payments over a set period of time. These loans have an interest rate, repayment terms and fees.

Households of color hold a much larger share of consumer debts such as credit cards and installment loans than white households. In fact, consumer credit made up 43.5 percent of all debt for Black households and only 22.8 percent of total debt for white households, found the most recent Federal Reserve quarterly data on household wealth distribution.

Read full story at Finurah here.

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