By Lee, Jonghee; Hanna, Sherman D.
Consumer Interests Annual , Vol. 53
The non-business bankruptcy filing rate doubled between 1990 and 2004, and then increased even more because of the impending change in bankruptcy rules. Was part of the increase due to changing attitudes toward credit use? This study analyzes consumer attitudes about whether it was acceptable to borrow money to cover living expenses when income is cut. Based on a logistic regression model with a combined sample of the SCF datasets, respondents in 2001 and 2004 were more likely than respondents in 1998 to think it was acceptable to use credit to cover living expenses, but attitude changes do not seem consistently related to changes in the overall bankruptcy rate. The rate of having a positive attitude toward credit decreases strongly with age and increases with income, even after controlling for other factors. Households that spent more than income, had low comprehensive assets and non-couple households were more likely to have positive attitudes toward using credit to cover living expenses. A better understanding of this credit attitude can assist consumer educators, financial advisors, and policy makers
in helping consumers who might be engaging in risky financial behaviors.
Access to credit has increased substantially during the past 30 years in the United, with the increase in credit cards. Along with the increase in credit access, bankruptcies have increased in the past 20 years, to the point where almost 9% of all households have experienced a bankruptcy (Marcuss, 2004). Figure 1 shows the increase in non-business bankruptcy rates over the past 25 years. The decision to file for bankruptcy is typically triggered by unforeseen adverse events such as job losses or uninsured illnesses (Athreya, 2004). However, Marcuss (2004) suggested that the frequency of such triggering events has not increased. The increase in filing rates might be attributed to a decline in social sanctions for promise breaking and the loss of a sense of shame people feel when such values are internalized (Buckley & Brinig, 1998). Changes in social norms related to credit might have led to changes in consumer attitudes.
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It might be rational to plan on using credit rather than to save for emergencies (Chang, Hanna, & Fan, 1997; Hatcher, 2000), although such a strategy has risks for those who do not consider the potential costs of not being able to pay off credit balances. Financial educators suggest that households hold enough emergency funds in cash equivalent accounts to cover three to six months of expenses (Greninger, Hampton, Kitt & Achacoso, 1996). However, only 30% of households in 1998 had enough monetary assets to cover three months of expenses (Bi & Montalto, 2004). Using credit for living expenses may be risky, because they do not create assets that the lender can claim (Black & Morgan, 1999). It could take a household many years to pay back credit card balances over a period of time and end up costing them much more in the future, therefore leaving them in a more vulnerable financial position. Further, filing for bankruptcy results in a lower credit rating and a constrained access to credit in the future (Board of Government of the Federal Reserve System, 2006).
Some observers have suggested that attitudes toward credit have become more relaxed, as consumers are willing to borrow more, and to borrow for seemingly riskier purposes (Black & Morgan, 1999). Castellani and DeVaney (2001) analyzed attitudes toward credit use for living expenses, using the 1995 Survey of Consumer Finances. They found that a positive attitude for using credit to cover living expenses was related to age groups younger than 55, racial groups other than White, low income groups, and those with a history of late credit payments. A better understanding of the likelihood of risky credit usage when income is cut can assist consumer educators, financial advisors, policy makers and counselors in helping consumers who have potentially risky credit behavior. …