As trust manifests in the financial language that shapes the capitalist world, it takes the shape of credit. Credit is a combination of subjective and objective forces, and when it is institutionalized and infected with subjective prejudice over the course of history, what was intended as an objective judgment carries significant bias, an extremely impactful bias. 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 historical race and class dynamics as inequality grows. This is 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, and thereby keep a strong credit score, are doubly rewarded because of their wealth. Meanwhile, 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 (Shao, 2012), then 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. This process is driven by hegemonic social pressures of consumerism (Bernthal, 2005) . Because of this, inequality becomes less a less salient issue as the divide between the wealthy and the non-wealthy is covered by a facade of parity (Indiviglio, 2010). This process limits the likelihood that institutions will change to fix inequality, as 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. Black and Hispanic people are more likely to be unable to pay for these emergencies (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 contrast. (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 per capita wealth somewhere between 3% and 10% of white per capita 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. Colorblind, in this case, is the principle that an ignorance of group distinctions, at least nominally, reduces prejudice. But colorblindness is also a tool for convenient disregard for existing and institutional racism (Rosenthal, 2010). This is the pattern of institutional behavior that leads to the continuing disadvantage of historically marginalized groups, and it has done so in the case of credit and wealth inequality, following in the footsteps of Jim Crow.

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 black 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 worthwhile rates (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 burst of the housing bubble in the late aughts 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-Americans 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 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). For example, the Seaway Bank and Trust Company, one of the largest black-owned banks in Chicago went under in January of 2017 as they no longer had the capital to operate safely, largely due to the lingering effects of the housing crisis (Kenney, 2017) The banks still in operation provide much needed services, going into and serving communities that other organizations will not.

The only real way to make tangible 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, as they directly relate to the financial issues. In the absence of significant change to existing banking and credit systems, these methods are a way to level the playing field with regards colorblind policy.

Real, structural change to the credit system can happen. It can happen on the input side in the form of some sort of redistribution, directly giving disprivileged people the assets they need to build and sustain wealth. It can also happen at the point of contact disprivileged people have with credit suppliers. This latter method could follow the recommendation of the United Nations Working Group in providing special financial services and support to disprivileged people. Without steps such as these, 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. Instead of providing support and scaffolding for mobility, the present-day credit system works to confirm already existing inequalities. In order to move toward fixing these issues, the credit system must change to be conscious of disprivilege, or else work for the interests of the wealthy and privileged.


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February 12, 2018