Academic journal article Journal of Commercial Banking and Finance

Consumer Debt: Who's at Risk? Evidence from the 1998 Survey of Consumer Finances

Academic journal article Journal of Commercial Banking and Finance

Consumer Debt: Who's at Risk? Evidence from the 1998 Survey of Consumer Finances

Article excerpt


This article uses data from the 1998 Survey of Consumer Finances to examine which types of households carry higher relative levels of debt and may thus be at greater risk in an economic downturn. Results reveal that lower net worth households carry higher levels of credit card and installment debt. Higher net worth households, however, use higher levels of less costly mortgage and home equity debt. These findings also reveal that younger households and married households use higher levels of debt providing further substantiation for Modigliani's life cycle theory.


In recent years there has been growing concern about the rising level of consumer debt (Kennickell et al., 2000; Maki, 2000). This concern has often been brushed aside in the face of strong employment and healthy stock market gains, both of which have enabled households to service higher levels of debt. More recently, however, employment has faltered in many sectors, and individual stocks have declined by twenty to forty percent. A growing number of households are now vulnerable to the financial pressures associated with high levels of debt. This article will use data from the 1998 Survey of Consumer Finances to explore the types of debt held by households and to identify those households that may be most vulnerable to financial distress during an economic downturn. It will examine the effects of age, wealth, gender, and race on debt use to determine if households having certain demographic characteristics are at greater risk.


In a 1986 article Franco Modigiliani (Modigliani, 1986) posited a life cycle hypothesis for household saving. He noted that income and household requirements vary over the course of the life cycle as the size and needs of the family changes. This would lead to lower savings for the young and higher savings for more mature couples whose children have left. Avery et al. (1987) also referenced the life cycle hypothesis in a discussion of consumer installment debt. They contend that families use debt to bridge the gap between income and needs, particularly the need for large consumer durables. Thus, younger families who are building households would have higher levels of debt and older families with more modest needs would have lower levels.

Using the 1995 and 1998 Surveys of Consumer Finances, Kennickell et al., (2000) found that debt repayments in 1998 represented a larger share of income than in 1995. Similarly, the percentage of families who were late with their payments by at least 60 days was higher in 1998 than in 1995. As Modigiliani suggested, Kennickell et al. found that debt use increases with age but declines after the age of 45, largely due to paying off the mortgage on a primary residence.

Maki (2000) examined the ratio of debt service to net worth to find that lower income households carried the highest relative levels of debt. He also found that consumer confidence has an effect on households' willingness to accumulate debt. The growth in consumer durables and consumer credit were highly correlated leading him to conclude that the use of debt may signal optimism about the future. Chien and Devaney (2001) similarly found that attitude has an impact on the willingness to use credit card debt and installment loans. Households with a more favorable attitude toward credit were significantly more likely to use debt than those with a less favorable attitude. Chien and Devaney also found that married households, professional households, higher income households, and more highly educated households held higher levels of debt.

Taken together, the results of prior research suggest that debt use is determined by age, income, marital status, education, and attitude toward debt. This research will examine the effect of these variables as well as variables representing gender and race.


Data for this study were drawn from the 1998 Survey of Consumer Finances (SCF) conducted every three years by the Federal Reserve. …

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