NEW YORK—The New York Fed today unveiled a new tool—the Credit Insecurity Index—to provide policymakers and the broader public with a more comprehensive measure of credit access and community credit health. Unlike other metrics that focus on residents without a credit file or score, the Credit Insecurity Index also includes individuals who may have credit files but are limited in their ability to borrow at affordable terms due to blemishes on their records. A new series of reports—Unequal Access to Credit: The Hidden Impact of Credit Constraints—offers in-depth analysis using the new index, including potential policy applications.
"Credit access is a lens on a community's ability to build wealth and weather a financial storm," said Kausar Hamdani, senior vice president at the New York Fed. "But to understand the opportunities and challenges around accessing credit, we need to capture the reality that potential borrowers face. The Credit Insecurity Index offers an improved and more policy-relevant assessment of community credit health by incorporating constraints on those who have access to mainstream credit, yielding insights that might otherwise be missed. Index scores identify communities across the nation where unequal access to credit remains a serious—and in some cases, entrenched—problem."
Leveraging the New York Fed's place-based Community Credit analytical framework, the Credit Insecurity Index addresses existing gaps in familiar measures of credit access. By focusing on the share of residents with a credit file and score, traditional measures do not account for hurdles to obtaining credit at choice, such as low credit scores, poor debt payment histories or over-utilized credit lines. Evidence suggests credit constraints can play a key role in fueling financial insecurity, with a recent survey finding that 17% of U.S. adults are unable to pay all of their current month’s bills in full.
The new Credit Insecurity Index offers an improved, place-based assessment of community credit health by capturing both those disconnected from mainstream credit and the prevalence of credit-limiting constraints in a single, comprehensive score. To gauge the relative severity of insecurity, communities’ scores are sorted into severity tiers, ranging from "credit-assured" (communities with the lowest index scores) to "credit-insecure" (communities with the highest index scores).
As detailed in Unequal Access to Credit: The Hidden Impact of Credit Constraints, the new tool underscores the importance of credit constraints in assessing community credit health. Standing at 23.8 as of Q4 2018, the index score for the U.S. indicates that the prevalence of credit constraints more than doubles the level of nationwide credit insecurity relative to traditional measures of credit access. Furthermore, in assessing the impact at the local level, the index score shows that 49.1 million U.S. adults—or approximately 19.4% of the U.S. adult population—live in counties designated as "credit insecure" or "credit-at-risk," the two worst-performing tiers.
Additional key findings from the series of reports include:
Historical trends:
- The nationwide index score for Q4 2018 (23.8) is higher than that of Q4 2007
(22.9), suggesting the country's credit recovery remains incomplete. - Between 2007 and 2018, only 15% of U.S. counties experienced an improvement in their severity tier. Furthermore, 814 counties, representing 26% of all U.S. counties, remained as either "credit-at-risk" or "credit-insecure" between 2007 and 2018, indicating entrenched credit insecurity in these communities.
Demographic and Geographic Trends:
- Among states in 2018, Mississippi ranked as the most credit-insecure in the nation, followed by Arkansas, Texas, Louisiana and Oklahoma. Conversely, New Hampshire, Minnesota, Vermont and New Jersey ranked as the least credit-insecure.
- Between 2007 and 2018, New York experienced the largest score improvement (falling by 3.1 points), outpacing the national average. During this same period, Wyoming experienced the weakest recovery, with its Credit Insecurity Index score rising 4.7 points.
- Counties in the two most credit-insecure tiers are more likely to be rural, have higher poverty rates and lower median household incomes relative to their state, and have larger African-American and Hispanic shares of the populations.
- 27% of the population in the best ("credit-assured") severity tier counties is non-white, compared to 55% of the population in the worst ("credit-insecure") severity tier counties.
About the New York Fed's Community Credit Framework and the Credit Insecurity Index
The Credit Insecurity Index focuses on the adult population that is credit constrained, that is, unlikely to obtain credit at choice to manage emergencies, take advantage of opportunities or invest in one's future. A community with a larger share of credit-constrained individuals is less credit secure and resilient than is a community with a smaller share.
The Community Credit and Credit Insecurity measures have three data sources. For the credit values, we use the New York Fed's Consumer Credit Panel/Equifax (CCP), which consists of detailed Equifax credit report data for a unique longitudinal quarterly panel of individuals and households. The panel is a five percent nationally representative sample of all individuals with a social security number and a credit report. All information is anonymized. Year-end (Q4) values are used to calculate index scores unless otherwise noted. For more information about the CCP, see the Federal Reserve Bank of New York Staff Report, An Introduction to the New York Fed Consumer Credit Panel.
For the U.S. population values needed to calculate the Included and Not-Included measures, we use population estimates provided by the U.S. Census Bureau's Population Estimates Program (PEP). Additionally, for the county-level economic indicators, we use estimates provided by the U.S. Census Bureau's 2013-2017 5-Year American Community Survey.
