The Federal Reserve Bank of New York released a report on how to measure communities’ financial health, Unequal Access to Credit: The Hidden Impact of Credit Constraints. The report introduces the New York Fed’s new Credit Insecurity Index, which measures a community’s credit health by combining information about levels of inclusion in the formal credit economy with other factors that may constrain individuals’ ability to borrow at fair terms when they choose. The authors discuss the value of the index as an indicator of a community’s financial stability, explain what the index shows about credit insecurity, and suggest several policy applications.
Just as an individual’s credit score is an indicator of their financial health, the Credit Insecurity Index is designed to indicate the relative access to credit of communities as a whole. One familiar measure of a community’s access to credit, the share of its residents in the formal credit economy, does not reflect obstacles individuals face in obtaining credit products at fair terms when they choose—obstacles such as low credit scores, poor debt payment histories, or over-utilized credit lines. The Credit Insecurity Index computes the credit outcomes of a representative sample of all individuals in a community, including information about residents excluded entirely from the formal credit economy and information about residents with no revolving credit product, high utilization of credit lines, Equifax Credit Risk scores below 580, and consistently delinquent payment histories. Higher credit insecurity scores indicate that people in a community will have fewer resources to draw on to respond to economic downturns, natural disasters, and other emergencies.
Communities were grouped into “severity tiers” on the basis of their Credit Insecurity scores. The authors found that these scores generally aligned with other markers of economic well-being. Relative to other counties, credit-insecure counties were often rural, with lower median income ratios, more unemployment, less educated talent pools, and higher shares of African American and Hispanic residents. The authors identified 426 counties as falling into the most severe credit insecurity tier and 643 as falling into the second-most severe credit insecurity tier. Many of these are clustered in the South and Southwest. In the fourth quarter of 2018, Mississippi ranked as the most credit-insecure state in the nation, followed by Arkansas, Texas, Louisiana, and Oklahoma. The authors also looked at trends in credit insecurity from 2005 to 2018. Access to credit throughout the country was harmed by the Great Recession, and although access has been improving since 2012, it remains below pre-recession levels for the U.S. as a whole.
Finally, the authors discuss how the Credit Insecurity Index is relevant to policy and practice, though they make no policy prescriptions. They note that the index helps to identify communities in distress that might otherwise be missed, to measure the magnitude of a community’s distress, to make comparisons between communities, and to track progress in credit insecurity over time.
The report is at: https://nyfed.org/36iMKx5