America is a nation propped up on credit card debt, and data collected by the Federal Reserve shows that minorities are most at risk of damaging their financial futures due to poor credit card management. African American households, in particular, were shown to spend larger percentages of their incomes paying credit card and other high interest rate debt, heading closer to foreclosure and bankruptcy while enriching lenders.

Federal Reserve Senior Economist and Project Director Arthur B. Kennickell conducted a survey of consumer finances to determine the distribution of wealth in the U.S. between 1998 and 2001. It was found that minority families added on debt at a rate far greater than they increased their incomes, thereby reducing the overall wealth-building power of every dollar they earned. Minority families also racked up more than twice the debt of their white counterparts. White households did, however, hold a higher debt load in actual dollars than their minority counterparts, but their percentage increase in debt did not surpass their average income growth level.

Credit card debt has caused African American families to use critical financial resources to pay mounting monthly interest payments instead of saving or acquiring assets such as real estate. It has also caused long-term disadvantages for African Americans because of the way lenders assign interest rates and insurance companies set premiums. Financial companies base interest rates on credit scores that are calculated, in part, by looking at how people use their credit and whether they pay their debt on time. The amount of debt a person has in relation to the overall credit available to them counts toward their credit score as well. Above-average debt means lower credit scores, for which lenders charge higher interest rates. (See "How to Get A-1 Credit," this issue.) Carrying a lot of credit card debt hurts the scores of African Americans significantly.

Unfortunately, most of the debt African Americans have accumulated is used for items that depreciate in value, such as cars, furniture, electronics, and appliances. This is an indication that blacks are using credit inappropriately-to stretch their incomes. But historic redlining by traditional banks has left high-interest credit cards as one of the few easily accessible sources of loans for minorities. Robert D. Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit (Basic Books; $18), looks at how the business of credit cards has grown. He notes that African Americans have been easy prey: "Lenders know that once they have you paying month-to-month, it's hard to break free. The sooner they have people in debt, the longer the revenue stream persists."

Manning, who is also special assistant to the provost and a business professor at Rochester Institute of Technology in New York, says poor credit card management generally begins in college as students try to maintain the lifestyles that were provided by their working parents, or as they try to emulate their fellow students. And he says African American students have additional challenges, citing a Fisk University study that showed "half the students at Fisk who were from households with an income of $55,000 or below were [under] pressure to send money home and took on more debt than they should have."

Mike Schiano, vice president of outreach for the Orlando, Florida-based nonprofit InCharge Education Foundation, explains that if credit cards are maxed out, a sudden reduction in household income due to a layoff or illness leaves a family with nowhere to go except to even costlier sub-prime and predatory lenders, which only adds to the problem. He says that a credit rule of thumb is to not purchase anything you can't pay off in 90 days.

Tahira K. Hira, a professor of family finances and consumer economics at Iowa State University, reminds consumers that credit is "a tool for doing financial transactions, but not for spending money that you don't have." She stresses that to improve credit management, consumers should keep only a few credit cards and use them for convenience-not for borrowing. "Using credit cards isn't a bad thing; having high balances are," Hira says.

Karlene E. Bowen is Fair Isaac Corp.'s client relationship director in Jacksonville, Florida. She says studies show that good financial management for African Americans requires actively tracking credit card usage and considering it a portion of overall net worth. "Focus on paying your bills on time and not using all of your available credit. If you've had late payments in the past, don't despair," Bowen says. "Just be more diligent going forward."

This story ran on Black Enterprise on Nov 2004.Vol.35, Iss. 4.