What Accounts for Racial and Ethnic Differences in Credit Use?

Abstract

Credit use varies widely among U.S. households; racial and ethnic differences are particularly striking. We examine whether household and residential-area characteristics can account for differences in use of bank credit (e.g., credit cards) and nonbank credit (e.g., payday loans). We use a novel dataset with information on previously unexplored factors, including income volatility, households’ attitudes toward banks, proximity to bank and nonbank financial providers, and neighborhood attributes. Although we account for much of the raw differences in credit use, residual racial and ethnic disparities are large. We discuss factors likely to be driving the residual disparities, and implications for policy.