New Evidence on Credit Card Borrowing and Repayment Patterns
Jiang, Sarah S., Dunn, Lucia F., Economic Inquiry
Credit cards have become a major factor in the economic life of American households. Credit card debt has been growing significantly since the 1990s, and revolving credit now stands at approximately $800 billion. (1) Problems stemming from the recent economic downturn have put a renewed focus on credit cards. New laws regulating the industry have recently gone into effect, and further legislative action is under consideration. Publicly available datasets have not previously contained information on payoff rates; therefore, typically only one side of credit card behavior (i.e., the borrowing side) has been examined. Here we use data from a new survey, the Consumer Finance Monthly (CFM), that contains complete payoff as well as borrowing information, and this allows us to capture both sides of consumers' credit card behavior.
We first use these data to examine the debt and payoff of consumers by age category. While credit card debt has been rising for virtually all socioeconomic and demographic groups, there has been special concern about the rising debts of younger consumers. Specific measures aimed at young card users were enacted under the new Credit Card Accountability Responsibility and Disclosure Act of 2009. These provisions include prohibiting credit card banks from soliciting with giveaways within 1,000 feet of a college campus and requiring official parental permission for underage credit card holders. (2) Increased availability of credit and changing consumption patterns, as well as marketing efforts, have all played some role in the rising debt of younger cardholders (Wang and Xiao 2008).
We also use the new data to examine the impact of raising minimum required payments. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act led to increases in minimum required payments, and this trend has accelerated during the recent economic downturn as banks have tightened credit conditions for many consumers. Our data allow us to estimate the percentage by which actual payoff rates increase when required minimum payment rates are changed.
Consumer debt has traditionally been analyzed within the Fisher framework of consumption smoothing over the life cycle. This framework relies on the underlying assumption that consumers will indeed successfully repay over time the debt acquired earlier in life. However, the introduction of credit cards with the feature of flexible repayment may have changed the traditional patterns of consumption smoothing and debt repayment for many U.S. households, especially for younger households. Here we examine credit card behavior in a synthetic cohort approach which incorporates a time dimension to build profiles of these behaviors for different birth cohorts. A two-way fixed effect, pseudo-panel data model is used to characterize both the cohort effects and the time effects. The results show that younger American consumers are indeed borrowing more heavily and repaying at lower rates on credit cards than earlier generations. The accumulation of credit card debt is found to continue over the life cycle. If these trends persist, there would be a substantial buildup of credit card debt for the younger generations at a later period in their life.
We also find that raising minimum required payments increases actual repayment rates more than proportionately. This latter finding provides useful information for issues of "anchoring" on minimum required payments that have been raised by previous researchers.
The article proceeds as follows. Section II briefly reviews relevant previous research. Section III discusses the data and descriptive statistics. Section IV presents the econometric model and estimation procedure. Section V presents the empirical findings for debt and payoff rates and the impact of raising minimum required payments. Finally, Section VI summarizes and gives conclusions.
II. PREVIOUS RESEARCH
In the absence of payoff rate data, much of the previous research in this area has focused on the borrowing side of credit card behavior. …