Board of Governors of the Federal Reserve System

Banking and Credit

Most adults have a bank account and are able to obtain credit from mainstream sources, but notable gaps in access to basic financial services still exist among minorities and those with low incomes. On average, individuals with capacity to borrow on a credit card are more prepared for financial disruptions.

Unbanked and Underbanked

Although the majority of U.S. adults have a bank account and rely on traditional banks or credit unions to meet their banking needs, gaps in banking access remain. Six percent of adults do not have a checking, savings, or money market account (often referred to as the "unbanked"). Two-fifths of unbanked adults used some form of alternative financial service during 2018—such as a money order, check cashing service, pawn shop loan, auto title loan, payday loan, paycheck advance, or tax refund advance.¹³ In addition, 16 percent of adults are "underbanked": they have a bank account but also used an alternative financial service product (figure 14).¹⁴ The remaining 77 percent of adults are fully banked, with a bank account and no use of alternative financial products.

The unbanked and underbanked are more likely to have low income, less education, or be in a racial or ethnic minority group. One percent of those with incomes over $40,000 are unbanked, versus 14 percent of those with incomes under that threshold. Similarly, 14 percent of blacks and 11 percent of Hispanics are unbanked, versus 4 percent of whites (table 11).

Table 11. Banking status (by family income, education, and race/ethnicity)

Individuals who use alternative financial services (one-fifth of adults) may need or prefer to conduct certain financial transactions through providers other than traditional banks and credit unions. The vast majority (89 percent) of people using alternative financial services use transaction services such as purchasing a money order or cashing a check at a place other than a bank (table 12). Twenty-eight percent borrowed money using an alternative financial service product, including payday loans or paycheck advances, pawn shop or auto title loans, and tax refund advances.

Table 12. Forms of alternative financial services used

Credit Outcomes and Perceptions

The majority of U.S. adults who applied for credit in 2018 were able to obtain it, but a sizable share report barriers or limitations to borrowing. During 2018, more than one-third of adults applied for some type of credit. Of those who applied for credit, 23 percent were denied at least once in the prior year, and 31 percent were either denied or offered less credit than they requested.

The incidence of denial or limitations on credit differs by the family income of the applicants and by their race and ethnicity. Lower-income individuals are substantially more likely to experience adverse outcomes with their credit applications than those with higher incomes. Among applicants with incomes under $40,000, 37 percent were denied credit, versus 10 percent of applicants with incomes over $100,000. Within each income bracket, black and Hispanic individuals are more likely to report an adverse credit outcome, relative to white adults (table 13).

Table 13. Credit applicants with adverse credit outcomes (by family income and race/ethnicity)

Negative perceptions may be an additional barrier to credit. About 1 in 10 adults put off at least one credit application because they thought that their application would be denied. This includes 5 percent who applied for some credit, but opted against submitting additional applications because they expected to be denied and 3 percent who desired credit but did not apply at all for fear of denial.

Although some people are forgoing credit applications because they expect a denial, most adults (79 percent) are at least somewhat confident that they could obtain a credit card if they were to apply for one. Those with low incomes are substantially less confident about being approved than those with high incomes (table 14). Additionally, credit perceptions differ by race and ethnicity, although these gaps are at least partially attributable to other socioeconomic factors that also vary by race.¹⁵ The patterns in 2018 are consistent with those seen in recent years.

Table 14. Confidence that a credit card application would be approved (by family income and race/ethnicity)

Credit Cards

In people's financial lives, credit cards can serve different functions at different times. For people who pay their balances off each month, credit cards are mainly a form of payment convenience and can be thought of more or less the same as using cash. For those who carry a balance, however, the card represents borrowing and carries a cost in the interest payment and any fees that are incurred.

Overall, 8 in 10 adults have at least one credit card, and the share with a credit card is higher among those with higher incomes, more education, or who are white (table 15). Among those with a credit card, 47 percent had paid their bill in full every month in the prior year. One-quarter carried a balance once or some of the time in that year; the remaining 27 percent carried a balance most or all of the time (figure 15). The frequency of regular borrowing with credit cards during 2018 is similar to 2017.

Table 15. Has at least one credit card (by family income, education, and race/ethnicity)

On average, individuals with capacity to borrow on a credit card are more prepared for financial disruptions. Transactional users of credit cards who never carry a balance are much more likely to say that they would pay an unexpected $400 expense with cash or its equivalent, compared to those who carry a balance most or all of the time or who do not have a credit card (table 16).

Table 16. Financial preparedness measures among adults (by credit card use)

Similar patterns are evident across these groups for other ways of coping with financial shocks, such as having a three-month rainy day savings fund and expressing confidence that their application for a credit card would be accepted. Financial buffers are also related to the incidence of problems in access to funds in a bank account (see box 3).

 

References

 

 13. This fraction using alternate financial services was somewhat lower in 2018, but the latest survey clarified that only check cashing or money order services not conducted at a bank should be included. Thus, the two years of data are not directly comparable. Return to text

 14. The most recent FDIC National Survey of Unbanked and Underbanked Households in 2017 found that a similar 6.5 percent of households were unbanked and 18.7 percent of households were underbanked. However, the FDIC uses a broader underbanked definition, which includes international remittances and rent-to-own services as alternative financial services. See Federal Deposit Insurance Corporation, 2017 FDIC National Survey of Unbanked and Underbanked Households(Washington: Federal Deposit Insurance Corporation, October 2018), https://www.economicinclusion.gov/surveys/2017household/. Return to text

 15. In a regression including marital status, age, education, income, employment status, region, and urban/rural residence, the difference in confidence between black and white adults narrows but remains significant. The gap between Hispanics and white adults is largely accounted for by these demographic factors. Return to text