Top

Journal of Financial Services Research

Published in:

23-01-2020

Credit Card Debt and Consumer Payment Choice: What Can We Learn from Credit Bureau Data?

Author: Joanna Stavins

Published in: Journal of Financial Services Research | Issue 1/2020

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

We estimate a two-stage Heckman selection model of credit card adoption and use with a unique dataset that combines administrative data from the Equifax credit bureau and self-reported data from a representative survey of consumers. Higher-income consumers carry higher credit card balances, but they tend to repay those balances each month. Credit card revolvers have lower income and are less educated. Revolvers are twice as likely to use debit cards as credit cards for payments, but they carry much higher balances on their credit cards. The high cost of paying off credit card debt likely exacerbates existing inequalities in disposable income. Unlike the mortgage market, we find no evidence for lenders’ cutoff between subprime and prime consumers in the credit card market.

previous article The Systemic Risk Implications of Using Credit Ratings Versus Quantitative Measures to Limit Bond Portfolio Risk

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

The SCPC questionnaire and data are available at https://www.frbatlanta.org/banking-and-payments/consumer-payments/survey-of-consumer-payment-choice.

See http://www.fico.com/en/products/fico-score.

The two-stage Heckman model cannot be estimated here, because the entire sample consists of credit card holders. Thus, credit card adoption = 1 for everyone in the sample, and so stage 1 of Heckman (adoption) cannot be identified.

Federal Reserve Economic Data, see https://fred.stlouisfed.org/series/TERMCBCCINTNS

https://en.wikipedia.org/wiki/Schumer_box

RD analysis includes several steps. In step 1, we plot the relationship between the outcome variable and the rating variable to investigate what functional form to use. The data fit a 2nd degree polynomial with no discontinuity at 650. In step 2, we select a bandwidth based on minimizing MSE and test the validity of RD. The bandwidth is 60, or consumers with risk score between 590 and 710. RD is tested by examining if consumers can cross the 650 threshold and if the density of the variable is continuous. The test showed no statistical evidence of systematic manipulation of the score variable. In step 3, we estimate the treatment effect using observations within the chosen bandwidth [590, 710] using the specification: Credit _ Balance = α + β₀T_i + β₁R_i + β₂R_iT_i + β₃DEM_i + ε_i where T_i is the treatment effect indicator, and R_i is the rating variable included to correct for selection bias (Heckman and Robb 1985). The coefficient on the treatment effect indicator T_i is not significant.

Agarwal S, Ambrose BW, Liu C (2006) Credit lines and credit utilization. J Money Credit Bank 38(1):1–22CrossRef

Angrisani, Marco, Kevin Foster, and Marcin Hitczenko (2017) The 2015 survey of consumer payment choice: technical appendix. Federal Reserve Bank of Boston Research Data Reports No 17–4

Bhardwaj, Geetesh, and Rajdeep Sengupta (2011) Credit scoring and loan default. Federal Reserve Bank of St. Louis Working Paper No. 2011-040A

Brevoort KP (2011) Credit card redlining revisited. Rev Econ Stat 93(2):714–724CrossRef

Brown, Meta, Sarah Stein, and Basit Zafar (2013) The impact of housing markets on consumer debt: credit report evidence from 1999 to 2012. Federal Reserve Bank of New York Staff Reports No 617

Brown M, Haughwout A, Lee D, van der Klaauw W (2015) Do we know what we owe? Consumer debt as reported by borrowers and lenders. Econ Policy Rev 21(1):19–44

Calem PS, Jagtiani J, Lang WW (2017) Foreclosure delay and consumer credit performance. J Financ Serv Res 52(3):225–251CrossRef

Castronova E, Hagstrom P (2004) The demand for credit cards: evidence from the survey of consumer finances. Econ Inq 42(2):304–318CrossRef

Ching A, Hayashi F (2010) Payment card rewards programs and consumer payment choice. J Bank Financ 34(8):1773–1787CrossRef

Cole, Allison, Scott Schuh, and Joanna Stavins (Forthcoming) Matching consumer survey data with credit Bureau Data. Federal Reserve Bank of Boston Research Department Working Papers.

Connolly, Sean, and Joanna Stavins (2015) Payment instrument adoption and use in the United States, 2009–2013, by consumers’ demographic characteristics. Federal Reserve Bank of Boston Research Data Reports No. 15–6

Deaton A, Grosh M (2000) Consumption. In: Grosh M, Glewwe P (eds) Chapter 17Designing household survey questionnaires for developing countries: lessons from ten years of LSMS experience. World Bank, Washington, DC

Demyanyk, Yuliya, and Matthew Koepke (2012) “Americans cut their debt.” Federal Reserve Bank of Cleveland Economic Commentary August 2012

Dey, Shubhasis, and Gene Elwood Mumy (2009) Determinants of borrowing limits on credit cards. Available at SSRN: https://ssrn.com/abstract=889719 or https://doi.org/10.2139/ssrn.889719

Emekter R, Yanbin T, Jirasakuldech B, Min L (2015) Evaluating credit risk and loan performance in online peer-to-peer (P2P) lending. Appl Econ 47(1):54–70CrossRef

Fulford, Scott, and Scott Schuh (2017) Credit card utilization and consumption over the life cycle and business cycle. Federal Reserve Bank of Boston Research Department Working Papers No. 17–14

Greene, Claire, Scott Schuh, and Joanna Stavins (2017) The 2015 survey of consumer payment choice: summary results. Federal Reserve Bank of Boston Research Data Reports No. 17–3

Gross DB, Souleles NS (2002) An empirical analysis of personal bankruptcy and delinquency. Rev Financ Stud 15(1):319–347CrossRef

Han, Song, Benjamin J. Keys, and Geng Li (2015) Information, contract design, and unsecured credit supply: evidence from credit card mailings, Finance and Economics Discussion Series 2015–103, Board of Governors of the Federal Reserve System

Heckman JJ (1976) The common structure of statistical models of truncation, sample selection and limited dependent variables and a simple estimator for such models. The Annals of Economic and Social Measurement 5(4):475–492

Heckman J and Robb R Jr. (1985) Alternative methods for evaluating the impact of interventions. J Econometrics 30(1-2):239–267

Hurd MD, Rohwedder S (2009) Methodological innovations in collecting spending data: the HRS consumption and activities mail survey. Fisc Stud 30:435–459CrossRef

Imbens G, Lemieux T (2008) Regression discontinuity designs: a guide to practice. J Econ 142:615–635CrossRef

Karlan D, Zinman J (2008) Lying about borrowing. J Eur Econ Assoc 6(2–3):510–521CrossRef

Keys BJ, Mukherjee T, Seru A, Vig V (2010) Did securitization Lead to lax screening? Evidence from subprime loans. Q J Econ 125(1):307–362CrossRef

Klee, Elizabeth (2006) Families’ use of payment instruments during a decade of change in the U.S. payment system. Board of Governors of the Federal Reserve System Finance and Economics Discussion Series 2006–01

Koulayev S, Rysman M, Schuh S, Stavins J (2016) Explaining adoption and use of payment instruments by U.S. consumers. RAND J Econ 47(2):293–325CrossRef

Lopes P (2008) Credit card debt and default over the life cycle. J Money Credit Bank 40(4):769–790CrossRef

Meier S, Sprenger C (2010) Present-biased preferences and credit card borrowing. Am Econ J Appl Econ 2(1):193–210CrossRef

Mester LJ (2012) Changes in the use of electronic means of payment: 1995–2010. Federal Reserve Bank of Philadelphia Business Review Q3:25–36

Min I, Kim J-H (2003) Modeling credit card borrowing: a comparison of type I and type II Tobit approaches. South Econ J 70(1):128–143CrossRef

Muñoz, Ana Patricia, and Kristin F. Butcher (2013) Using credit reporting agency data to assess the link between the community reinvestment act and consumer credit outcomes. Federal Reserve Bank of Boston Community Development Discussion Papers No. 2013–2

Musto DK, Souleles NS (2006) A portfolio view of consumer credit. J Monet Econ 53(1):59–84CrossRef

Nichols J, Pennington-Cross A, Yezer A (2005) Borrower self-selection, underwriting costs, and subprime mortgage credit supply. J Real Estate Financ Econ 30(2):197–219CrossRef

Rysman M (2007) An empirical analysis of payment card usage. J Ind Econ 55(1):1–36CrossRef

Sánchez, Juan M. (2014) Paying down credit card debt: a breakdown by income and age. Federal Reserve Bank of St. Louis Regional Economist April

Schuh S, Stavins J (2010) Why are (some) consumers (finally) writing fewer checks? The role of payment characteristics. J Bank Financ 34(8):1745–1758CrossRef

Schuh S, Stavins J (2013) How consumers pay: adoption and use of payments. Accounting and Finance Research 2(2)

Stavins, Joanna (2016) The effect of demographics on payment behavior: panel data with sample selection. Federal Reserve Bank of Boston Research Department Working Papers No. 16–5

Stavins, Joanna (2017) How do consumers make their payment choices? Federal Reserve Bank of Boston Research Data Reports No. 17–1

Sudman S, Bradburn NM, Schwarz N (1996) Thinking about answers: the application of cognitive processes to survey methodology. Jossey-Bass, San Francisco

Tourangeau R, Rasinski KA, Bradburn N (1991) Measuring happiness in surveys: a test of the subtraction hypothesis. Public Opin Q 55(2):255–266CrossRef

Zinman J (2009) Where is the missing credit card debt? Clues and implications. Rev Income Wealth 55(2):249–265CrossRef

Title: Credit Card Debt and Consumer Payment Choice: What Can We Learn from Credit Bureau Data?
Author: Joanna Stavins
Publication date: 23-01-2020
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 1/2020
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-019-00330-8