Fewer blacks are in the black

Debt. Everyone has some these days. From our own federal government (the current federal deficit is a whopping $11.3 Trillion) to the typical college graduate who has on average $20,000 in debt. Even the King of Pop, Michael Jackson, may he rest in peace, died with an estimated $400 million in debt.

Debt has become such a prevalent part of American society that it is giving apple pie a run for its money as the quintessential symbol of all things American. The most recent statistics released by the Federal Reserve state that Americans are carrying over $2.5 Trillion in consumer debt, including car loans and credit card debt but excluding home mortgages. That equates to an average of $24,000 per household.

Credit, when handled responsibly, can be a useful wealth building tool. However, when abused, it can turn into a ticking time bomb, quickly eroding a family's ability to build wealth as they divert earnings from savings and asset-building investments to paying onerous credit card balances. Unfortunately, the latter more accurately depicts the relationship most African Americans have with their credit.

Minority families increase their outstanding debt at a rate much greater than they increase their incomes. This is partly due to racial disparities in incomes as the typical Black family has an income that is only 58 percent of a typical white family's. Declines in black male incomes and low marriage rates are the main drivers for this statistic. Consequently, minorities often use credit to stretch their incomes and to purchase depreciating assets like clothes, cars and electronics.

Couple this with the fact that minorities rack up debt almost twice as fast as their White counterparts and you have a recipe for serious financial distress. This manifests itself in the massive disparity between black and white's net worth.

African-American families in the United States have a median net worth of $20,600, a mere 14.6 percent of the $140,700 median white net worth. This net worth gap only narrowed by three percentage points between 1983 and 2004 for Black and Latinos, suggesting it will take well over six hundred years for the gap to close at its current rate.

Lower incomes, higher debt loads and fractional net worth are all troubling realities of Black America's financial health. Unfortunately, the story doesn't end there. High debt to income ratios often lead to poorer credit scores and higher interest rates, making credit even more costly for Blacks.

It is therefore, no surprise that a disproportionate amount of African-Americans became prey to subprime mortgage lenders who offered individuals with less than stellar credit the opportunity to qualify to purchase and refinance homes using exotic loan products such as interest-only and adjustable rate mortgages. According to Home Mortgage Disclosure Act data, Blacks are three times as likely as Whites to have received a subprime loan and four times as likely to have refinanced from a subprime lender.

Homeownership for years had been championed as one of the most effective wealth building tools in America. However, the current mortgage crisis reveals that mortgage debt can also have catastrophic effects if used inappropriately. Dangling the hope of the American Dream, numerous mortgage companies profited handsomely over the years by signing financially distressed minorities up for subprime loans they could not reasonably afford with teaser introductory rates that later ballooned to unconscionable double-digit amounts.

Like many Americans, most believed that their homes would appreciate and they would be able to refinance or sell by the time their interest rates reset, therefore avoiding the brunt of higher interest payments and building equity in the process. The collapse of the domestic real estate market, has all but evaporated any appreciation in home values in recent years leaving millions of American homeowners "underwater." According to the Center for Responsible Lending, Blacks will lose between $71 billion and $92 billion in home-value wealth from subprime loans.

The evidence is resoundingly clear - when it comes to personal finances, fewer blacks are in the black.