Credit Cards Offer Less Credit in Black Neighborhoods, Federal Reserve Study Says

Credit card companies offer residents of majority black communities a lower credit limit than residents with the same profile who live in white neighborhoods, an economist at the Federal Reserve Bank of Boston has found.

For his report, "Credit Card Redlining," Ethan Cohen-Cole studied the credit reports of 285,780 individuals, finding that a 1% increase in the percentage of blacks in an area corresponds to a reduction in available credit of $123. Moreover, moving from an 80%-majority white neighborhood to an 80%-majority black neighborhood reduces credit by an average of $7,357.

"Using a unique and proprietary database of credit histories from a major credit bureau, this paper links location-based information on race with individual credit files," Mr. Cohen-Cole writes. "After controlling for the influence of such other place-specific factors as crime, housing vacancy rates, and general population demographics, the paper finds qualitatively large differences in the amount of credit offered to similarly qualified applicants living in Black versus White areas."

While similar research has been conducted on mortgages, the study is unusual in its examination of access to credit cards.

"If you have a credit card and a high credit limit, it raises your credit score; if you use only a small portion of your credit, it raises your score even more," an associate professor of law at Georgetown University Law Center, Adam Levitin, said. "In black neighborhoods, because they have lower credit limits, they end up using more of their available credit," leading to lower credit scores even if they pay their bills on time. "So people in black neighborhoods are more creditworthy than their credit scores reflect." He called Mr. Cohen-Cole's data "very robust."

Credit scores are critical, used in determining access to mortgages and other loans and in setting the interest rates that are paid on these loans.

The Fed study is based on a nationwide sample of credit reports from June 2003 and December 2004, data from the 2000 census, and crime reports from the Federal Bureau of Investigation.

Those most impacted by redlining — a term coined in the 1960s to refer to mortgage discrimination, where red lines would be drawn on a map to delineate areas where banks would not invest — are residents of black neighborhoods with solid credit. "As credit quality increases, Black individuals with 'good' credit receive relatively smaller advantages for the improved performance," Mr. Cohen-Cole wrote.

The report also found that the percentage of foreign-born in a neighborhood is statistically significant and is correlated with reduced available credit.

"Remarkably, in spite of identical scores and identical community characteristics, our individual in the Black neighborhood receives less consumer credit (i.e. fewer credit cards) than the individual in the White area," Mr. Cohen-Cole wrote. "That is, in spite of the fact that both have been assessed to have similar risks of nonpayment, as determined by the credit score, the person living in the Black area has less ability to access credit."

Calls to the American Bankers Association yesterday were not returned, and representatives from the New York Bankers Association could not immediately comment on the report. "The views expressed in this paper are solely those of the author and do not reflect official positions of the Federal Reserve Bank of Boston or the Federal Reserve System," a note on the front page of Mr. Cohen-Cole's study reads.

Banks that issue credit cards have access to the same information as was used in the study, and "while marketing departments may draw on additional external information," Mr. Cohen-Cole points to the card issuers as responsible for the racial discrepancy in credit.

"The results suggest that the observed differences in credit lines by racial composition of neighborhood are largely driven by issuer decisions rather than by demand," he wrote.

In 1977, Congress passed the Community Reinvestment Act, requiring banks to meet the credit needs of low-income neighborhoods.