Living in a ‘financial desert’ means you’re likely to have low credit, delinquent accounts

Your financial health is partially a result of whether or not you grew up in proximity to banking or other financial institutions, according to a new study from Iowa State University.

Those who were exposed to banks at earlier ages have increased financial literacy and trust of the institution. However, people who grew up in “financial deserts” – swaths of neighborhoods without banks – hesitate to get credit, resulting in lower credit scores and more delinquent accounts.

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The study will be published in the Journal of Financial Economics.

“The fact that this has a lingering impact is important because people don’t have a lot of control over where they grow up,” said researcher James Brown, Kingland MBA professor, in a release. “I remember growing up right across the street from a bank and going with my dad to open my first account. But a lot of people grow up in an environment where banks are not visible and it’s not as easy to connect to a financial institution at a young age.”

The researchers obtained their data by studying people on Native American reservations with tribal courts, comparing them to people on Native American reservations with state courts. Reservations with tribal courts had 20% fewer bank branches per capita in the 2000s.


For those who grew up with fewer financial institutions:

  • They are 20% less likely to have a credit report
  • They have 7 to 10-point lower credit score
  • They have 2 to 4 percent higher delinquency rates
  • The effect on their credit scores is similar to the effect of reducing annual income by $6,000

Moving to a community with “stronger financial markets” does improve individuals’ situations. However, researchers estimated, it still takes about 17 years to get their credit score back on track and 12 years to reduce delinquency rates.

“Exposure and trust go together,” said Brown. “If you grow up in an environment with more banks, you’re more inclined to trust banks and the financial system. If you grow up in a financial services desert, you’re much less likely to trust financial institutions, which may be one reason you don’t engage or you don’t pay back your credit card bills with the same frequency.”

Relatedly, The New York Times reported on financial deserts in 2017, writing that “the Bronx has fewer bank branches than any borough except for Staten Island.”

That same year, the Wall Street Journal reported on the closure of black-owned banks across the country. On the South Side of Chicago, a resident told the paper that fewer small banks in her neighborhood meant that it would turn into a financial desert, with only “predatory institutions” available for banking, like payday lenders and check-cashing joints.

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