Why Credit Literacy Is Important for Black and Hispanic Students

Education is often viewed as the great equalizer in society. Many students believe that by getting a college degree they can increase their earning potential and access to social and economic resources.

However, even as more Black and Hispanic students earn their degrees, income and wealth gaps still persist after college graduation between them and their white peers.

Among lower- and middle-income households, white families accrue four times as much wealth as Black families, and three times as much wealth as Hispanic families, according to a Pew Research Center study.

Credit scores also reveal the racial wealth gap. Studies show that Black and Hispanic families have less access to traditional credit, face higher rates of unemployment and underemployment, and are more likely to be saddled with higher student loan debt.

All of these factors have an impact on a person's credit score and their ability to generate and keep wealth.

For these reasons, credit literacy remains especially important for Black and Hispanic students.

Paris Chevalier, a senior-level credit union and financial executive, says that one of the most important things Black and Hispanic students can do to help close the racial gap in financial literacy is to take an interest in money topics and seek out authoritative sources such as a local credit union.

"It can be very motivating once they understand how critical some basic financial principles are to their futures," Chevalier said.

What Is the Credit Gap?

The credit gap provides evidence that not only do Black and Hispanic families face less access to traditional credit, they also have lower credit scores than white families.

In October 2020, majority-white communities had a median credit score of 725 compared to 661 for majority-Hispanic communities, 612 for majority-Black communities, and 603 for majority-Native American communities.

Credit scores range from 300-850. Having a higher credit score offers many benefits, such as having access to lower-interest loans.

Five factors that help determine your credit score include:

• Your payment history: This accounts for 35% of your score and stems from if you make your payments on time. Payments that are 30 days late typically have the most impact on your credit score.
• How much you owe: The amount you owe on loans and existing credit cards account for 30% of your score.
• The length of your credit history: This accounts for 15% of your score. The longer your history of making on-time payments, the higher your score can be.
• The type of accounts you have: This makes up 10% of your score. Having a mix of installment and revolving accounts — from mortgages, auto loans, and credit cards — can help improve your score.
• Recent credit activity: This makes up the final 10% of your score. If you have opened up a lot of accounts or applied for a lot of accounts recently, this can lower your score.

People of color are less likely to have credit cards and are more likely to be credit invisible. This means they have no credit history.

In a 2020 survey, 18% of Black respondents had no credit score, compared to 15% of Hispanics/Latinos, 13% of white people, and 10% of Asian Americans.

A 2021 Urban Institute study found that people of color are more likely to have subprime credit scores (scores ranging from 580-619). Forty-five percent of African Americans and 32% of Latinos — compared to 18% of whites — were more likely to have scores that qualified as subprime.

Going into credit card debt can also be an issue. Some credit card users end up living on credit and going deeper into debt, without the ability to pay back the principal.

What Is the Racial Gap in Financial Literacy?

Financial literacy refers to a person's knowledge and understanding of skills such as budgeting, investing, borrowing, taxation, and financial management.

Having access to financial education may help students avoid payday loans, have better credit outcomes, reduce credit card debt, and have overall better financial health.

Access to a financial education remains inherently unequal.

Less than 12% of U.S. students are required to take a personal finance class to graduate high school — and the gap is even wider for people of color. For Black and brown students, only 7.4% are required to take a financial literacy course before graduating high school.

South Bay Credit Union has a Banzai program — a free online financial literacy program for educators and students.

"Knowing how to create a budget, how checking accounts work, how to manage credit cards and other types of loans, and understanding the "magic" of compounding — these are the fundamentals of personal finance. And people who master them are the ones who go on to achieve financial success," Chevalier said.

How Financial Literacy Impacts Black and Hispanic Students

The TIAA Institute annually tracks financial literacy among the U.S. adult population. The index is based on eight different factors and is considered a robust measure of overall financial knowledge.

The eight factors include:

1. Earning
2. Consuming
3. Saving
4. Investing
5. Borrowing/managing debt
6. Insuring
7. Comprehending risk
8. Go-to information sources

Black and Hispanic students face socio-economic barriers that contribute to the racial gap in financial literacy.

They are more likely to be first-generation college students. Because of this, Black and Hispanic students may face greater pressure to work while they are studying to support themselves or their families.

This additional pressure, and the fact that they cannot concentrate fully on their academics, decreases their grades and, eventually, the resources they have to achieve financial independence.

This creates fewer resources to achieve financial independence and makes it challenging to save and invest money.

Black and Hispanic students are more likely to carry higher rates of student loan debt. They are more likely to take out private loans, which often have higher interest rates. These private student loans are usually used for college costs that family contributions, grants, scholarships, and lower-rate federal student loans don't cover.

If these learners are first-generation college students, they may lack the skills, education, and guidance to help them assess the risks on borrowing loans and managing debt.

The learning doesn't need to stop here

Explore the rest of our collection of financial education resources to continue your journey to a healthy financial future.

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How to Close the Racial Gap in Financial Literacy

Expanding access to financial literacy education can be one of the keys to alleviating the racial wealth and credit gap.

"Young adults can really get off on the right foot financially if they learn how to budget and track their spending," Chevalier said. "With the many money management apps now available, that's never been easier."

Here are five paths that individuals from traditionally marginalized groups and their allies could take to help close the gap now.

1. Build on Motivation

Effective financial literacy education capitalizes on people's motivations. It's important to understand the motivations or factors that influence people's spending and financial management habits. Educators should work to understand what particularly motivates Black and Hispanic students — beyond what all students need — and craft financial literacy education around these motivations.

2. Connect Financial Literacy to Advocacy Organizations

An important strategy in financial literacy is meeting Black and Hispanic students' needs. Finding ways to connect financial literacy to nonprofit or advocacy-based organizations in the community can be a great strategy. Programs such as the Native Financial Education Initiative, for example, provide financial literacy to tribal leaders and communities.

3. Provide One-on-one Counseling Support

The racial gap in financial literacy is complex and thus cannot be solved by a one-time strategy. Ongoing one-on-one financial literacy counseling has proven to be effective in eliminating the gaps in financial literacy and strengthening one's knowledge and financial management skills.

4. Focus on Financial Skill-building

Teach students behaviorally based strategies. These strategies can range from managing a budget to avoiding exploitative credit card rates. Providing students timely financial skills as they are making important financial decisions is known as a "just-in-time financial education."

5. Focus on Smart loan Borrowing

Student debt is a financial challenge facing many Black and Hispanic students. Many are first-generation college students and have to navigate how to take out student loans with little guidance. High schools should provide their students with a financial literacy education that teaches them how to assess loan interest rates before they fall into high-interest situations, the cost and impact of carrying high student debt, and effective strategies to pay off loan debt.

Financial Literacy Resources for Black and Hispanic Students

There are several resources for expanding your financial knowledge and literacy skills. Check out these eight resources:

• The Hispanic Center for Financial Excellence: This is a resource for free financial education services. It provides resources on saving money and reducing debt.
• Snowball Wealth: Provides tools for students to help pay down or lessen loan debt.
• Finhabits: This money app for Latinos provides resources and knowledge on investing and retirement planning.
• My Money My Future: A comprehensive financial education platform that includes budgeting and investing tools and financial-management action plans. This platform is geared to Black and Latino millennials.
• "Stock Market Investing Mini-Lessons for Beginners" by Mabel Nunez: This is a great book for anyone looking to learn more about investing without the complicated financial lingo.
• "Black Money Matters": A podcast geared toward Black people on financial literacy. Topics include budgeting, generating wealth, credit scores, taxes, and more.
• Mint: This budget tracker and planner helps you manage your finances.
• "The Psychology of Money" by Morgan Housel: A great read for anyone interested in how our values and experiences shape our views and behaviors around money.

Frequently Asked Questions About Credit Scores

With Advice From:

Paris Chevalier

Paris Chevalier is a progressive senior-level credit union and financial executive, with a record of continuous success in growing revenues and improving brand awareness. She is well-versed in strategic planning and organizational design. Chevalier has proven her ability to implement process efficiencies, innovate, and build highly successful teams. She currently serves as president and chief executive officer at South Bay Credit Union in Los Angeles, California. As a credit union development educator, Chevalier is passionate about the "people helping people" ethos of credit unions and 100% committed to the credit union movement and member-first philosophy.

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