Debt can help or hurt wealth building


— Money and credit are two items that affect nearly everyone. We earn, spend and sometimes save money. But it seems nearly inevitable that the need for credit arises and efforts to retire it become debt that can hang around longer than a bad penny.

For most Americans, debt is a complicated reality. Whether a consumer is retired, nearing the end of a career or beginning one, the likelihood of holding debt of some kind is fairly high. A new research report by Pew Trust finds that 80 percent of the nation has some form of debt and further that nearly 7 in 10 view debt as a necessity they would prefer not to have.

By comparing and contrasting how families of different generations, races and ethnicities hold debt, the new report suggests that as conditions vary, debt can help or hurt a consumer’s ability to build wealth.

A mortgage loan, for example, is often a debt that becomes a building block to accumulating family wealth. As consumers pay down mortgage principal, home equity generally grows correspondingly. In these circumstances over the life of the loan, homeowners gain choices to keep the home and eventually retire its mortgage or move into a higher-value home with proceeds from its sale reducing the need to finance the purchase.

Not every homeowner, however, enjoys that same rosy financial prospect. Homeowners of color – largely Black and Hispanic – who experienced higher rates of foreclosures and/or depreciated values because nearby foreclosures, mortgage debt can restrict their financial choices.

“[H]ome equity for Black homeowners has not increased at the same rate as it has for White homeowners, largely because home values in minority neighborhoods have been slow to recover since the housing crisis, and so have generated lower returns on mortgage debt,” states the report.

Similarly, while incurring student loans is often viewed as an essential investment in a career and a middle-class lifestyle, racial disparities persist.

“Despite the higher-than-average rate of student loan debt among young Black Americans, it is not clear that this debt is fully building their human capital,” the report explains. “Black Gen Xers and millennials who owe student debt in their own names are more likely than their white peers to be paying for a degree they did not complete (38 percent versus 26 percent).”

Even more startling, when Pew asked student loan borrowers whether they would do things differently if they had that chance, a majority of both Blacks (51 percent) and Hispanics (52 percent) responded they would find a different way to pay for school in order to owe less money. By contrast, only 32 percent of White respondents gave the same answer.

Before anyone concludes that buying a home or getting a college education is a poor financial decision – think again.

According to Sarah Wolff, a senior researcher with the Center for Responsible Lending (CRL), the Pew report portrays the complexities – not the inevitability of debt.

“The implications of debt for opportunities depend not just on the raw dollar amount of debt but also on the quality and appropriateness of the product,” noted Wolff. “Not all student loans are the same. This is true for all kinds of loans – including mortgages and credit cards,” Wolff said. “The terms and conditions under which loans are made are very important and we should consider these factors when trying to answer broad questions like “is debt good or bad.”

CRL’s recent report on the cumulative impacts of predatory lending likens consumer credit to a hammer – which can be used to build a house or destroy it. Pew’s research provides evidence that debt is actually both good and bad.

“It is the terms and conditions under which credit is extended that ultimately determine how the loan affects a borrower,” concluded Woolff.

Other independent CRL findings help to explain why debt affects borrowers in different ways:

Across many financial products, low-income borrowers and borrowers of color are disproportionately affected by abusive loan terms and practices; and

Loans with problematic terms are repeatedly concentrated in neighborhoods of color.

Understanding these factors that affect our daily lives should also spur continued work to eliminate and rid the marketplace of products that are designed to trap borrowers in debt while enriching lenders.

On a personal level, perhaps we can do ourselves a financial favor by taking time to review the fine print of loan and credit agreements; and insisting on clear answers to our credit questions before another debt is incurred. Every consumer considering a financial obligation has a right to know.

Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at