New York Fed: Millions of potential borrowers face hard time accessing credit

Millions of American adults live in credit-insecure or credit-at-risk counties where they have limited access to affordable credit options, according to a series of reports from the Federal Reserve Bank of New York.

The report, titled “Unequal Access to Credit: The Hidden Impact of Credit Constraints”, analyzed credit access and community credit health in US counties using the New York Fed’s newly launched Credit Insecurity Index.

"Credit access is a lens on a community's ability to build wealth and weather a financial storm," said Kausar Hamdani, senior vice president at the New York Fed. "But to understand the opportunities and challenges around accessing credit, we need to capture the reality that potential borrowers face.”

The index, which addresses existing gaps in credit access, found that 49.1 million adults (19.4% of the US adult population) live in the counties designated as "credit insecure" or "credit-at-risk." Nationwide, people had trouble accessing affordable credit in the fourth quarter of 2018 due to the blemishes on their records.

Studies showed that credit constraints play a significant role in fueling financial insecurity. A recent survey revealed that 17% of adults were unable to pay all of their monthly bills in full. From 2017 to 2018, 814 counties were designated as either credit-at-risk or credit-insecure, indicating deep-rooted credit insecurity in these communities.

“The Credit Insecurity Index offers an improved and more policy-relevant assessment of community credit health by incorporating constraints on those who have access to mainstream credit, yielding insights that might otherwise be missed,” Hamdani said. “Index scores identify communities across the nation where unequal access to credit remains a serious—and in some cases, entrenched—problem."

Other key findings of the reports revealed that:

• The nationwide index score for Q4 2018 (23.8) is higher than that of Q4 2007 (22.9), suggesting the country's credit recovery remains incomplete.
• Between 2007 and 2018, only 15% of US counties experienced an improvement in their severity tier.
• Among states in 2018, Mississippi ranked as the most credit-insecure in the nation, followed by Arkansas, Texas, Louisiana and Oklahoma. Conversely, New Hampshire, Minnesota, Vermont and New Jersey ranked as the least credit-insecure.
• Between 2007 and 2018, New York experienced the largest score improvement (falling by 3.1 points), outpacing the national average.
• Counties in the two most credit-insecure tiers are more likely to be rural, have higher poverty rates and lower median household incomes relative to their state, and have larger African-American and Hispanic shares of the populations.
• 27% of the population in the best ("credit-assured") severity tier counties is non-white, compared to 55% of the population in the worst ("credit-insecure") severity tier counties.