Why a New Credit Card Study Isn't Really About Credit Cards

My new study out this week from Demos and the National Council of La Raza (NCLR) looks at credit card debt in the Latino community. But it isn't ultimately about credit cards at all.

Instead, it's a look at how our unemployment insurance system has failed to protect out-of-work Americans, how vast sectors of our economy fail to offer employees health coverage, and how wages have failed to keep up with the cost of living. It's an account of how Latinos, who are disproportionately uninsured, disproportionately employed in low-wage jobs, and historically face difficulty in accessing mainstream credit opportunities, are among those bearing the brunt of these trends. And it's a look at how discriminatory treatment and fraud continue to plague Latinos in the United States, even when dealing with large and mainstream financial services companies . Finally, amidst the multiple economic failures described above, the study is a hopeful glimpse at how common-sense regulation can work successfully to help households save money and pay down debt. And okay, maybe it's also about credit cards.

First, consider unemployment.

The study finds that unemployment is a leading contributor to credit card debt among Latino households. Among low- and middle-income Latino households carrying credit card debt, 1 in 3 report that a layoff or other loss of a job contributed to their current credit card debt and one 1 in 5 report job loss was the single greatest contributor to their debt. This isn't the all-too-typical credit card story about the need for more financial literacy or personal responsibility in spending -- instead it speaks to the 2.4 million Latinos who were unemployed, and the additional 2.5 million more who were underemployed in 2012 when the survey data was collected. The National Employment Law Project finds that due to a combination of language barriers, lack of familiarity with the program, and other factors, Latinos are less likely than Americans of other backgrounds both to apply for unemployment benefits and to receive benefits when they do apply. Even when unemployed workers do apply and qualify for benefits, payments may be too low to enable households to make ends meet, and benefits may run out before workers are able to find another job.

The result? For low- and middle-income Latinos -- and many other indebted Americans --credit cards become a privatized "plastic safety net" to pay for groceries and other necessities when the public safety net is insufficient. But unlike unemployment insurance or food stamps, credit card borrowing comes with high interest charges -- at rates that turn out to be significantly higher for Latino and African American borrowers than for whites.

Credit cards are also used to make up for inadequate wages when workers are on the job. In 2012, the median Latino man earned just 67 cents for every dollar paid to a non-Hispanic white man, while the median Latina earned just 59 cents. It's troubling -- but not surprising -- to learn that among low- and middle-income Latino households with credit card debt, 43 percent report using their credit cards to pay for basic living expense s such as rent, mortgage payments, groceries or utilities in the past year because they didn't have enough money in their checking or savings accounts. The Department of Labor notes that 6.8 million Latino workers would benefit if Congress raises the minimum wage to $10.10 per hour, including not just workers earning minimum wage but those paid just above the minimum who would also see their paychecks rise.

For more on how credit card use in the Latino community reflects disparities in health insurance coverage, the growing racial and ethnic wealth gap, and unequal access to credit, see the report itself . And if you're wondering about the impact of credit card debt on other communities, such as African Americans and senior citizens , see the earlier reports in our series.

But if you've been waiting for the good news on Latinos and credit cards, here it is: credit card reform legislation passed in 2009 has succeeded in adding new protections for borrowers and making credit cards a safer, fairer financial product. Latino credit cardholders have especially benefitted, reporting that they are now paying down debt more quickly and saving money by avoiding unfair fees. As a result of new disclosures and reduced fees in the mandated by the CARD Act, 38 percent of low- and middle-income Latino households with credit card debt report that they are paying more toward their credit card balances in a typical month, 41 percent say they are charged late fees less often, and 36 percent report they are charged over-the-limit fees less frequently -- benefits greater than those reported by credit card borrowers as a whole.

While financial services reform alone fails to address the deeper issues of why Latino households find themselves turning to credit cards to make up for larger shortcomings in job quality and the public safety net, it does offer a small indicator of how smart public policy can make a concrete and positive difference on people's lives. If we intelligently regulate credit card fees, borrowers will save more and pay less of them. If we improve the public safety net and improve job quality, households may not have to turn to credit cards and other forms of debt to make ends meet in the first place.