Your credit card limit may be determined by where you live or your ethnicity. Our article explains what 'redlining' is and whether it's legal.
When you apply for a credit card or credit limit increase, the lender will assess your credit worthiness. They consider a variety of financial criteria such as your income, expenses and credit history. But some observers suggest there is a deeper bias present: a geographic and even racial discrimination that can affect the amount of credit you receive.
The term 'redlining' originated in Chicago in the 1960s, when banks would mark a red line on a map to indicate the areas where they would not invest: typically inner-city black neighbourhoods. The term came to be associated with more general discrimination by financial institutions against a group of people (usually defined by their ethnicity) regardless of geography.
In both Australia and the United States, discriminatory lending is prohibited by law and credit institutions have long maintained that the practice does not occur. However in February 2008, an economist at the Boston Federal Reserve, Ethan Cohen-Cole, released an empirical study called 'Credit Card Redlining' which evaluated racial disparities in the issuance of consumer credit.
Cohen-Cole obtained a database of credit histories from a major US credit bureau and cross-referenced consumer addresses with ethnic composition data. His goal was to use the same information used by financial institutions in assessing credit card applications to uncover any spatial bias.
In an interview, Cohen-Cole stated "When you fill out a credit card application, you do not fill out your race. However, they do know where you live and they do know the racial makeup of where you live. By using that information, you can determine if the racial composition of the neighbourhood is one of the criteria they are using."
He found there exists 'qualitatively large differences in the amount of credit offered to similarly qualified applicants living in Black versus White areas'. In other words, applicants with identical risk profiles and payment histories were given different amounts of credit depending upon whether the lived in a 'white' neighbourhood or a 'black' neighbourhood.
Cohen-Cole included some caveats to his findings: the study cannot speak to individual issuers' assessment criteria - only aggregate lending patterns. He also stated 'given the degree of regulatory scrutiny over the credit decision itself, one suspects that if any disparity exists in the provision of credit, it likely originates in the pre-screening (marketing) efforts.' In other words, if a bias does exist (which his data suggests it does), it most likely occurs in the marketing of the product to specific geographic areas.
Regardless of where the bias originates, his findings raise serious concerns about the effects of redlining. Consumer and civil rights advocates suggest that the refusal of credit to minority or low-income groups causes them to seek finance from high-cost sources such as payday lenders and contributes to a spiral of debt and poverty.
