Contact with members of different groups can reduce prejudice and encourage people to recategorize members of other social categories. This research examines individual‐level social capital—one's experience with trust, reciprocity norms, and engagement within a given community—as a construct that predicts contact climate and recategorization. People who have high levels of social capital within a community are more likely to perceive a positive interracial contact climate. High social capital and a favorable contact climate can encourage people to focus on their shared identity as members of that community. Two studies support the claim that social capital predicts intergroup processes. Study 1 tests a cross‐sectional mediation model linking individual‐level social capital to perceptions of the contact climate, common in‐group categorization, and racial out‐group attitudes. Study 2 presents longitudinal data demonstrating that social capital's cross‐lagged effects on contact climate, categorization, and racial out‐group attitudes are stronger than their reverse effects. Implications for diversity research and community applications are discussed.