As trust manifests in the financial language that shapes the capitalist world, trust is manifested in the concept of credit. Credit is therefore a combination of subjective and objective forces, and when it is institutionalized and infected with subjective prejudice, what was intended as an objective judgment carries significant weight. Despite credit’s usefulness as an engine of economic growth at the level of the country, it has not become a major driver of social mobility (Calder, 2002). Instead, it is a function of existing economic liberalism, preserving race and class dynamics as inequality grows. This means that credit, as understood in its modern financial meaning, is an active driver of inequality and a barrier to racial equity due to the nature of its reliance on short-term financial information, thereby ignoring historical context and under-serving the people.

The credit system in its contemporary iteration largely serves the interests of the wealthy, and at times actively preys on the poor. First, it is important to note that a person’s credit score in many cases is determined by factors that point more to how profitable a person’s spending and payment patterns are to financial institutions rather than an actual measure of financial stability (Finlay, 2010). This means that wealthy people who can afford to go into small amounts of debt are doubly rewarded because of their wealth as the poor must choose between a good credit score and stable finances as people live paycheck to paycheck, unable to pay off chronic debt (Hodson, 2014). If the argument for the maintaining of this status quo is that credit is a driver of mobility, than the credit system should work in a way that serves less wealthy people who could get the most utility out of credit instead of aiding the wealthy, and driving inequality.

The credit system also allows less affluent people to consume in a manner that is greater than their assets would allow otherwise. This process of “Keeping up with the Joneses” is negative in two ways. The first being the direct lack of sustainability in a credit financed lifestyle. The second being that credit obscures inequality when people use it to finance lifestyles instead of to build wealth, a process which is driven to by hegemonic social pressures of consumerism (Bernthal, 2005) . Because of this, inequality becomes less of an issue as the divide between the wealthy and the non-wealthy is covered by a facade of parity (Indiviglio, 2010). Because of this palliative effect, a public that makes more use of credit is also less supportive of redistribution efforts that would actually alter the core circumstances that factor into inequality, thereby preserving it (Kus, 2015).

Secondary, less institutionalized lenders then take advantage of the poor, with payday lenders and similar firms charging triple digit interest rates for funds used for emergencies which Black and Hispanic people are more likely to be unable to pay for (Board of Governors, 2016). This steep price to pay often traps people in a vicious cycle of debt, with dependence on credit and debt holdings rising in concert, utterly wiping out any wealth accumulation as people in growing debt lose the assets they have (Melzer, 2011). The bottom 95% has more than double the debt-to-income ratio of the top 5%, making clear the progression from income inequality to debt inequality to wealth inequality, thereby serving to preserve class hierarchies and draw them into greater relief (Kumhof, 2011).

Credit does not just work purely along the lines of class, and is also racialized to a significant degree, further preserving the inequality that already exists, and therefore confirming existing racial oppression. Black people in the United States have an average income of about 65-70% that of white people (US Census, 2012), but the racial wealth gap is significantly larger, with black wealth somewhere between 3% and 10% of white wealth (Oliver, 2006). In the context of the legacy of slavery and Jim Crow, an inequitable credit system has suppressed the creation of black wealth with both race-conscious and supposedly colorblind policies. These race-conscious policies of Jim Crow disadvantaged black wealth creation by charging higher interest rates to black applicants or simply refusing to serve them. This forced these people to depend on loan sharks and other less savory ways of borrowing money. This is referred to as the shadow banking system, constructed in part of payday loan centers and pawn shops. This meant that mortgages, one of the premier paths to building equity in the middle of the 20th century, were significantly more difficult to obtain at rates that made them worthwhile (Oliver, 2006). Jim Crow cast a long shadow even after its laws were legally abolished. It created conditions whereby colorblind policies carried on the goals of Jim Crow in two ways. First, within institutions, policies persisted that did not do enough to correct the systemic bias of these discriminatory institutions. Second, at the point of contact with clients, colorblind policies relied on metrics, such as credit, to determine how customers would be treated. This preserves racial wealth inequality by using that same inequality to decide company practices (Bonilla-Silva, 2017).

Because of its role as both a metric of and factor in social-financial standing, credit becomes a self-fulfilling prophecy. When the process is stained by the legacy and present fact of systemic racism, this prophecy severely injures black people. It does not do so in a linear fashion oftentimes, instead the credit and loan system leaves Black Americans extremely vulnerable to economic forces. This came into focus, when the Great Recession and the housing bubble burst hit Black Americans especially hard, as they were disproportionately likely to have been provided subprime loans (Taylor, 2011). This cut Black wealth to a fraction of what it was before the crash. The fact that African-American were assigned these bad loans at such high rates, whether out of racial malice or colorblindness, shows how issues of credit directly impact the wealth of African-Americans and build upon historical injustice.

The Black community has tried to fight against the status quo of banks that fail to serve Black people in a variety of ways. This includes the variety of movements to patronize Black-owned businesses, keeping wealth within a community, but also black-owned banks that gained popularity at various points in the last century. The purpose of these institutions was to avoid structuring that confirmed abided by the existing systems which disadvantaged African Americans. These banks, however, could not overcome the systemic inequity faced by their patrons, succumbing to the same forces at the level of the corporation, with ramifications that stunted black entrepreneurship.  (Ammons, 2011). These banks provide much needed services, going into and serving communities that other organizations will not, enacting race-conscious policy

The only real way to make real steps towards fixing the systemic issues is to create race-conscious policy for the purpose of building black wealth (Carter, 2017). Some writers such as Ta-Nehisi Coates point to even more reasons for the inequality in racial wealth, and call for reparations. In a report to the UN Human Rights council, the United Nations’ Working Group of Experts on People of African Descent suggest that methods of reparation include “a formal apology, health initiatives, educational opportunities … psychological rehabilitation, technology transfer and financial support, and debt cancellation.” (Working Group, 2016). In discussions of directly rectifying issues related to the racial wealth gap, “financial support” and “debt cancellation” are the important terms. In the absence of significant change to existing banking and credit systems, these methods are a way to level the playing field in the face of colorblind policy.

Without real, structural change in the form of some sort of redistribution, it is inconceivable that Black wealth will ever be on par with White wealth, or that inequality as a whole will ever narrow. The issues of credit are due to the fact that they take place in a system with a variety of inequalities, and instead of providing support and scaffolding for mobility, work to confirm already existing inequalities. In order to move toward fixing these issues, the credit system must change to be conscious to operate with understanding of disprivilege, or else simply work for the interests of the wealthy.

 

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Board of Governors of the Federal Reserve System. Report on the Economic Well-Being of U.S. Households in 2015. Washington D.C., May 2016.

Bonilla-Silva, Eduardo. Racism without racists: Color-blind racism and the persistence of racial inequality in America. Rowman & Littlefield, 2017.

Calder, Lendol. “The evolution of consumer credit in the United States.” The Impact of Public Policy on Consumer Credit. Springer US, 2002. 23-42.

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Melzer, Brian T. “The real costs of credit access: Evidence from the payday lending market.” The Quarterly Journal of Economics 126.1 (2011): 517-555.

Oliver, Melvin L., and Thomas M. Shapiro. Black wealth, white wealth: A new perspective on racial inequality. Taylor & Francis, 2006.

Taylor, Paul, et al. “Wealth gaps rise to record highs between Whites, Blacks and Hispanics.” Washington, DC: Pew Research Center (2011): 37.

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February 5, 2018

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