Economic and Demographic Differences in Debt Delinquent Behavior

Article excerpt

Being late in debt payments face many negative consequences: a late fee will be charged, the practice will be recorded in credit reports, and the consumers will be the potential target of universal default. Being late for two months or more is considered a sign of financial difficulties. This study used data from the 2004 Survey of Consumer Finance to examine economic and demographic differences in late payment behavior. Both bivariate and multivariate analyses indicate that income, wealth, home ownership, age, family type, and race/ethnicity are associated with debt delinquent behavior. Lower income, lower wealth, non-homeowner, younger and mid-aged, married with children, single female with children, and black consumers are more likely than their counterparts to be late in debt payments. Consumers who are late in debt payment for two or more months are more likely than those who make payments on time to pay high interest rates (20% or higher) on their credit card debts. The findings have implications for consumer educators and policy makers. Consumer educators need to provide effective strategies and information for these consumers to avoid debt delinquent behavior; furthermore, policy makers should consider the vulnerability of these consumers and formulate appropriate policies to protect them.

Being late or missing a debt payment will have negative consequences for consumers. The most direct consequence is that a late fee will be charged, which, in recent years, can be as high as $39. Since 1993, late fees have risen by 194% (Cardweb, 2005). In addition, the behavior will be recorded by credit reports, often resulting in lower credit scores. Consumers who are late in debt payments with low credit scores may be the target of universal default, a controversial policy employed by many financial institutions. Many credit card issuers now routinely check their cardholders' credit reports and raise the interest rate on the card if there has been a change in the consumer's score, which is called the universal default policy. For example, if a consumer is late on her/his payment of the credit card issued by Bank A, Bank B will now raise the cardholder's interest rate. According to a survey by Consumer Action, 45% of banks reported 6having universal default policies. The most commonly cited circumstances that trigger a universal default rate hike are credit scores getting worse and paying mortgage, car loans, or other creditors late (Consumer Action, 2005). Consumer advocates consider this policy unfair to consumers and have raised the issue in front of the Senate Banking Committee (Holloway, 2005). New York state legislature even passed a law to ban this practice (Consumer Action, 2006) but it was vetoed by the governor (Kelly, 2006).

Universal default is one of many innovations that resulted from financial deregulation in the U.S. The deregulation makes financial institutions prosper, such as the credit card market. Before the deregulation, credit card divisions in banks always lost money, but after the deregulation, the credit card divisions became cash cows (see Manning, 2000). Ausubel (1991) demonstrated that even the structure of the credit card industry looks competitive after the deregulation, but its behavior is inconsistent with the outcome of economic theory predicts because it earned three to five times the ordinary rate of return in banking during the period 1983-1988. The profit of the credit card industry remained high in late 1990s (Ausubel, 1997). Ellis (1998) argued that the 1978 Supreme Court decision ("Marquette") fundamentally altered the market for credit card loans in a way that significantly expanded the availability of credit and increased the average risk profile of borrowers. The result was a substantial expansion in credit card availability, a reduction in average credit quality, and a secular increase in personal bankruptcies. The good news for consumers, especially low income consumers, is that they have broader access to credit (Bird, Hogstrom, & Wild, 1999; Johnson, 2005; Lyons, 2003). …