Access to Credit and Household Debt

Good financial health is essential to economic security and upward mobility

Houston-area residents are more likely to be banked, have better credit access and quality, and be current on debt obligations than in the past. However, despite this improvement, the Houston region continues to lag behind the nation in overall financial health, placing our most economically vulnerable residents at risk of financial exploitation.

The data

One out of four Houston-area households utilizes alternative financial services

Accessing credit through the “official” credit economy (e.g.,  banks or credit unions), is optimal over utilizing non-traditional sources (e.g., check-cashing services, pawn shop loans, auto title loans, and paycheck advances/ payday loans), because it allows the credit holder expanded choices with greater flexibility, provides more favorable rates and fee levels, and can offer future rewards and benefits. However, people generally pursue these non-traditional routes because they have been denied access to traditional banking services.

Unbanked residents are those who rely on non-bank financial services such as check-cashing services, money orders, pawn shop loans, auto title loans, paycheck advances or payday loans to manage their finances.¹ The unbanked are more likely to have lower incomes, less education, and identify as a person of color.²  Being unbanked also poses financial disadvantages. For example, you cannot access any systems that require a bank account to activate, such as direct deposit from an employer.

Underbanked households have a checking or savings account with a bank or credit union but also use alternative financial services (e.g., check-cashing services, money orders, international remittances, pawn shop loans, auto title loans, paycheck advances or payday loans) to manage their finances.

Households in the nine-county Houston Metropolitan Statistical Area (MSA) are more likely to be unbanked than the overall rate in Texas and the U.S. About 1 out of 12 Houston-area households are unbanked compared to 1 out of 20 in Texas and 1 out of 25 nationally. An additional 17% in the Houston Metro Area are underbanked, meaning one out of four households in the region uses non-traditional financial services, putting them at risk of exploitation and predatory financing. About three-quarters of Houston-area households are fully banked.

The percentage of unbanked households has declined across the nation, state, and Houston metro area since 2017. Despite this improvement, the Houston metro area’s share of unbanked households is still nearly twice that of the nation and slightly above Texas.

There are significant racial/ethnic differences among the fully banked. Black and Latino households are much less likely to be fully banked and more likely to use non-traditional/alternative financial services than their white counterparts for three significant reasons: discrimination, income disparities, and access levels. 

Black and Latino families have experienced explicit exclusionary practices within the financial system, such as redlining, and continue to experience more implicit forms today. Consequently, these discriminatory and harmful practices have contributed to a legacy of mistrust in the mainstream financial system among many people of color. Many traditional banks typically require account holders to maintain a minimum balance, but if that threshold is not met, they generally charge additional fees and penalties, and, ultimately, may close or deny future accounts altogether. Black and Latino families have lower access to traditional banks and more access to alternative financial institutions. Not only are there fewer bank branches in predominantly Black and Latino neighborhoods, but also there is a saturation of payday loan stores and check cashing outlets.³

About 1 in 5 Hispanic households in the Houston metro area are unbanked, compared to about 1 in 100 white households. About 18% of households in Texas and 17% of households in the Houston MSA were underbanked in 2021. As with unbanked households, there are significant differences in underbanked households by the race and ethnicity of the household. For example, about 1 in 4 Hispanic households in the Houston metro area are underbanked, compared to about 1 in 12 white households that are underbanked.

Credit access in the Houston region remains flat

Consumer spending patterns are closely linked to consumer confidence and overall economic health. Because credit drives and enables spending, access to credit tells us a lot about the overall economic well-being of our region and is typically measured by the percentage of the adult population (18 years and older) with a credit file and a credit score.

A credit score is a numerical representation of an individual’s creditworthiness, which is used by lenders, creditors, and other financial institutions to evaluate the risk associated with extending credit or lending money. Credit scores are primarily based on an individual’s credit history, which includes factors such as payment history, amounts owed, length of credit history, types of credit, and recent credit inquiries.

In 2018, about 90% of adults in Montgomery and Fort Bend counties had a credit file and a credit score, a larger proportion than at the national level (88%) and for Texas (85%). The percentage in Harris County was much more similar to the state average, with 84% of adults in the county having a credit file and a credit score. Performance on this measure in the Houston region and Texas has remained relatively unchanged since 2010, except for a slight dip in Fort Bend.

Having a credit file and credit score does not ensure timely access to credit. Revolving credit provides immediate credit at the credit-holder’s discretion. These lines of credit are called revolving credit because once made available, the credit is used, then paid for, and finally made available once again in a revolving cycle.⁴ Most people who participate in the credit economy have revolving credit in the form of a credit card or a home equity line of credit.

The percentage of adults who used revolving credit — in the form of a credit card or through home equity — has increased by 11 percentage points since 2010 in Texas. The Houston region also saw growth in this measure, but not as fast. Adults in Fort Bend are most likely to have access to revolving credit (79%), though 75% of adults in Montgomery and 71.5% of adults in Harris County do as well. The percentage of adults with access to revolving credit increased in 2018 by 7 percentage points in Fort Bend, 8 percentage points in Harris, and 6 percentage points in Montgomery counties since 2010.

Despite improvement, credit quality in Houston lags behind the nation

Accessing credit through the “official” credit economy (traditional pathways such as banks or credit unions), is optimal over utilizing non-traditional sources (e.g., check-cashing services, pawn shop loans, auto title loans, and paycheck advances/ payday loans), because it allows the credit holder expanded choices with greater flexibility, provides more favorable rates and fee levels, and can offer future rewards and benefits. 

However, people generally pursue these non-traditional routes because they have been denied access to the traditional/official credit economy, meaning these individuals are denied loans from traditional banks, are not issued credit cards, or don’t have valuable collateral to exchange. This leaves about 25% of our region with limited options while in a desperate situation. Not surprisingly, their vulnerability places them at greater risk of exploitation in the form of sky-high interest rates, exorbitant fees, and makes them more likely to need these services again.

Strong credit quality helps a family’s financial standing and positively impacts access to future credit that can allow a family to invest in wealth-building assets such as buying a home or building a business. Credit quality is determined by credit history and is measured by the percent of individuals in the credit economy who have reliable payment history — meaning, they are consistently current on all credit obligations.

The average American is more likely to be current on all debt obligations than the average Texan. In 2018, 78.5% of individuals in the U.S. credit economy were current on all debt obligations, while only 72% of Texans in the credit economy were on-time payers. Residents of Fort Bend have similar one-time payment rates as the national level (78%), while Harris had the lowest percentage of adults current on all credit obligations (72%).

When debts are not paid on time, the credit holder’s credit score is lowered, which results in a reduction in access to future credit. Credit scores are used to evaluate the risk associated with extending credit or lending money, and they are based on an individual’s credit history, which includes factors such as payment history, amounts owed, length of credit history, types of credit, and recent credit inquiries. 

Credit scores range from 300 to 850, with higher scores indicating “better creditworthiness.” A good credit score can help individuals secure better interest rates on loans, credit cards, and mortgages, as well as make it easier to rent an apartment or obtain certain types of employment.

Conversely, a low credit score can make it more difficult to obtain credit or result in higher interest rates, making borrowing more expensive. Individuals with a credit score below 660 are considered to have subprime credit. People who have subprime credit scores have limited options to access credit. The type of credit available to them is often high-risk because it comes with higher interest rates and exploitive repayment plans that can often trap individuals in a cycle of debt. Measuring the percentage of people with subprime credit has been used as an indicator of the health of Houston-area residents’ ability to access credit.

In 2018, about 30% of Americans had a subprime credit score (i.e., below 660), compared to 39% of Texans. Two out of five residents in Harris County had subprime credit — the highest in the region. A lower proportion of Fort Bend County and Montgomery County residents have subprime credit, with 30% and 33%, respectively. Each geography had experienced a downward trend in this measure since 2010.

Levels of debt in collections falls after the COVID-19 pandemic

Once we gain access to credit, we then hold a debt for that amount plus interest and any fees. Having debt is not necessarily a bad thing. Incurring debt can allow us to invest in something that has the potential to pay off later, build a positive credit history, give tax benefits, and more. Being in debt to buy a home, start a business, and pay for high-quality education or in-demand skills training have been identified as good investments that can increase one’s economic security and opportunity, including accumulating  wealth. 

However, unproductive debt is debt incurred to pay for basic needs and living expenses. We are more likely to accumulate unproductive debt during an unforeseen job loss or medical crisis, or because our current resources do not cover our expenses. Because it does not have the same long-term benefits, unproductive debt is riskier for the debt holder and society at large.⁵ 

An overreliance and dependence on credit can lead to the accumulation of unhealthy debt levels, which reduces the ability to make on-time full payments. When residents can’t meet payment obligations, they face additional fees and penalties, higher interest rates, lower credit scores, the potential loss of property such as vehicles and homes, and/or debt can go into collections. Debt goes into collections when the original creditor cannot collect payment on the debt, so they either sell or transfer the debt to a collections agency that tries to recover the money. Consequently, it becomes harder and more expensive to access credit.

Total Debt

The percentage of individuals in the credit economy with debt in collections is much higher at the state (Texas) level compared to the national level. About 37% of Texans have debt in collections compared to 26% among all Americans. Texas — along with South Carolina, West Virginia, and Louisiana — has the highest percentage of people with debt in collections in the nation. This finding is even more striking since Texas is the second-most populous state.

Similarly, 37% of people in Harris County have debt in collections, the highest level in Houston’s three-county region. About 26% of people in Fort Bend County and 29% in Montgomery County also have debt in collections, which is closer to the national level.

The percentage of individuals in the credit economy with debt in collections has declined nationally and in Texas since 2017. Between 2017 and 2022, the percentage of debt in collections fell three percentage points in Fort Bend, five points in Montgomery County, and seven percentage points in Harris County and at the state and national levels.

This decrease may be due to a combination of (1) the National Consumer Assistance Plan (NCAP) that was fully implemented in 2018 which changed reporting requirements and resulted in 8 million people having collections accounts removed from their credit report⁶; and (2) federal government action like mortgage and student loan forbearance implemented to mitigate the effects of the pandemic.⁷ In Texas specifically, the winter storm of 2021 also resulted in a large increase in mortgage forbearance in the state.⁸

Medical Debt

Medical debt refers to the share of people with a credit bureau record who have medical debt in collections. Texas has more people with medical debt in collections (19%) than the national rate (13%). Montgomery County has the highest share of debt holders with outstanding medical debt in the region (14%). 

Texas saw a seven percentage point decrease in medical debt in collections between 2017 (26%) and 2022 (19%), but still remains slightly higher than the national average of 13%. Harris and Montgomery counties both saw a decrease of five percentage points, and both counties remain in line with the national percentage (13%).

The national decline in medical debt in collections could be due to reduced health care use to prevent coronavirus exposure, growth in Medicaid enrollment, and pandemic relief measures. There is a risk that collections may increase when health care use rebounds and federal pandemic legislation expires. The southern states, including Texas, have a high prevalence of medical debt in collections partially due to differences in health insurance coverage and decisions not to expand Medicaid.⁹

Student Loan Debt

Student loan debt refers to the share of people with any student loan debt who are in default/debt in collections. About 9% of people in Texas and 8% nationally are in this position, which is on par with regional rates.

Fort Bend County saw a 10-percentage point reduction in the share of student loan holders with student loan debt in default — the largest decline in the region. Fort Bend went from having the highest percentage of student debt in default in 2017 (17%) to the lowest in 2022 (7%). Again, we saw declines across the board. The share of people who had student loan debt in collections fell eight percentage points across the nation during this time, six points in Harris County and across Texas, and five points in Montgomery County.

The general downward trend in student loan defaults is largely due to the student debt loan relief implemented during the pandemic and extended through mid-2023.¹⁰ On March 13, 2020, the federal government granted forbearance on student loan payments toward eligible loans. Forbearance allows borrowers to pause or reduce debt payments during periods of hardship, without showing the loan delinquent on the credit report.¹¹

Debt in Collections by Race/Ethnicity

As described in the Unbanked/Underbanked section above, the ability to access credit has historically been more fraught for people of color, particularly for Black and Latino households. Because finance policies disproportionately harmed some groups while simultaneously benefiting others, disaggregating this indicator by race and ethnicity is helpful. Additionally, debt can often burden family and community well-being and reinforce the wealth gap between white communities and communities of color.¹²

In each geography, communities of color (defined as a ZIP code where at least 60% of the population comprises people of color) are much more likely to have debt in collections than white communities (where at least 60% of residents are white). 

Across the nation in 2022, 35% of communities of color had debt in collections, compared with 22% of white communities. Nearly half of the people who live in communities of color within Texas, Harris County, and Montgomery County have debt in collections. In 2022, the percentage of debt in collections for communities of color compared to white communities was 27 percentage points higher in Harris County, 20 points higher in Montgomery County, 17 points higher in Fort Bend County, 16 points higher at the state level, and 13 points higher at the national level.

Median Debt in Collections

The median amount of debt in collections in the region, Texas, and nation does not differ widely, though people in Montgomery County have the highest median amount of debt in collections in the region. Within Houston’s three-county region, people in Harris County had the lowest median amount of debt in collections, but the highest proportion of people in collections.

The median amount of medical debt in collections is less than $1,000 across all geographies. While Montgomery County had the highest proportion of people with medical debt in collections, the median amount is lower than in Harris County.

While Fort Bend County may have the lowest percentage of student loan debt holders in default (7%), these debtors also have the highest median student loan debt amounts in default ($12,430). 

Household debt-to-income ratios fall the fastest in Fort Bend County

The household debt-to-income (DTI) ratio is calculated as the ratio of aggregate household debt from Equifax (excluding student loans) to aggregate income (from the Bureau of Labor Statistics). A DTI ratio lower than one indicates a household has more income relative to debt, whereas a DTI ratio higher than one indicates a household has more debt relative to their income. This common financial metric is used by lenders and financial institutions to assess an individual’s ability to manage debt payments relative to their income. Lenders use this metric to determine credit “worthiness.”

Regionally, we see a big variation in DTI ratios by county. In 2022, the DTI ratio was 3.3 in Fort Bend (in the top 25 percent of the distribution), 2.1 in Montgomery County, and 0.8 in Harris County (in the bottom 25 percent). Fort Bend County has the highest debt-to-income ratio, which is not surprising given the county’s high median income and, consequently, higher access to credit.

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