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 key indicators of financial health, placing our most economically vulnerable residents at risk of financial exploitation.

The data

Unbanked households in Houston are rising after years of decline

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. The unbanked are more likely to be younger, have lower incomes, less education, a disability, and identify as a person of color.¹  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 11 Houston-area households are unbanked compared to 1 out of 15 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.

Between 2017 and 2021, the percentage of unbanked households declined across the nation, state, and Houston metro. However, as of 2023, this rate has increased in Houston and across Texas. The Houston metro area’s share of unbanked households is more than 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 from historically marginalized communities. 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 16% of Hispanic households in the Houston metro area are unbanked, compared to about 4% of white households. As with unbanked households, there are significant differences in underbanked households by the race and ethnicity of the household. For example, about 1 in 5 Hispanic households in the Houston metro area are underbanked, compared to about 1 in 10 white households that are underbanked.

Availability of credit in the Houston region improves, surpassing the state and nearing the national average.

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 can be measured by the percentage of the population 15 years and older who utilize mainstream credit.

Mainstream credit refers to the full range of credit products that are typically reported to the nationwide credit reporting agencies that form the basis of your credit history and influence your 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 2023, about 82% of adults in the Houston Metro Area used mainstream credit in the past 12 months performing about on par with the state of Texas for this indicator and slightly below the national average.

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 — has increased by 10 percentage points in Texas and across the country since 2015. The Houston Metro Area saw this rate increase 17 points, and as of 2023 outperforms the state and is nearly on par with the nation overall. As of 2023, about three quarters of Houston metro residents have access to revolving credit in the form of a credit card.

Despite improvement, about a quarter of residents have a low credit score

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 percentage of individuals in the credit economy who have reliable payment history — meaning, they are consistently current on all financial obligations.

Falling behind on bill payments is a potential indicator of creditworthiness, providing insights into a household’s ability to satisfy its financial obligations and access different forms of credit. Across the Houston Metro Area, residents are about as likely to be current on all financial obligations as the average American with 87% of residents not falling behind on bill payments. Conversely, 13% of Houston area residents did fall behind on bill payments in 2023.

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 2023, Harris County had a higher rate of residents with a subprime credit score (i.e., below 660), with nearly 1 in 3, compared to Fort Bend and Montgomery counties where 1 in 4 residents had subprime credit scores. Fortunately, across all three counties the rate of residents with a subprime credit score has decreased by 5-6 percentage points since 2015 but have stagnated since 2021.

Medical debt in collections falls while student debt in default rises

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 has consistently been much higher at the state (Texas) level, since 2017, compared to the national level. About 32% of Texans have debt in collections compared to 22% among all Americans. Texas — along with Louisiana, South Carolina, and Georgia — 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.

In Harris County, 34% of residents have debt in collections, the highest level in Houston’s three-county region. About 22% of people in Fort Bend County and 25% 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 2023, the percentage of debt in collections fell seven percentage points in Fort Bend, nine points in Montgomery County, and ten percentage points in Harris County.

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 (9%) than the national rate (5%). Harris Montgomery counties have the highest share of debt holders with outstanding medical debt in the region (6%).

Texas saw a 17-percentage-point decrease in medical debt in collections between 2017 (26%) and 2023 (9%) but still remains slightly higher than the national average of 5%. Harris and Montgomery counties both saw a decrease of 12 and 13 percentage points, respectively, and both counties remain in line with the national percentage (5%).

The national decline in medical debt in collections is partially due to reforms in credit reporting practices. In 2022, credit-reporting companies removed medical debts in collections (that were eventually paid) from credit reports and extended the grace period for reporting unpaid medical debts from six months to one year. In 2023, medical debts in collection under $500 were excluded from credit reports entirely. It is estimated that within one year of these changes, more than 15 million Americans had their medical debt in collections erased from their credit reports and, as a result, roughly 27 million adults were able to increase their credit score from subprime (below 660) to near prime (between 601 and 660).⁵

Student Loan Debt

Student loan debt refers to the share of people with any student loan debt who are in default/debt in collections. While total and medical debt in collections have shown a decline, the past year has seen an increase in the rate of residents who have student loan debt in collections. About 15% of people in Texas and the nation are in this position, which is on par with regional rates.

Between 2017 and 2022, the percentage of student loan borrowers in default declined with Fort Bend County experiencing the largest reduction at 10-percentage points. However, rates of student loan defaults have increased, reversing past progress. As of 2023, Fort Bend County had the highest student loan default in the region at 17%.

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 from historically marginalized communities, 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 and non-white communities of color.⁶

In each geography, ZIP Codes where at least 50% of the population identifies as Black, Indigenous, Asian, Hispanic, or another non-white group are much more likely to have debt in collections than white communities (where at least 50% of residents are white). 

Across the nation in 2023, 29% of communities of color had debt in collections, compared with 19% of white communities. More than a third of the people who live in communities of color within Texas, Harris County, and Montgomery County have debt in collections. In 2023, the percentage of debt in collections for communities of color compared to white communities was 19 percentage points higher in Harris County, 13 points higher in Montgomery County, 6 points higher in Fort Bend County, 12 points higher at the state level, and 10 points higher at the national level.

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