Abstract
Excessive household debt contributed to the worst recession in decades. Insights about borrowing and spending behavior can inform economic recovery forecasts, policy decisions, and financial education. This study identifies life cycle and credit attitude as key determinants of who uses debt. Younger households are more likely to borrow for consumption, as are those who believe that it is all right to borrow to purchase luxury goods or cover living expenses. Furthermore, households that condone borrowing for these purposes have a higher consumer debt burden. Debt capacity (or creditworthiness) and financial discipline are also significant factors in determining household debt use.
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Notes
The data are available at www.federalreserve.gov/pubs/oss/oss2/2007/scf2007data.html.
The SCF also treats nonresponses differently. The method of multiple imputation replaces each missing value with a set of five values that represent a distribution of possibilities. Thus, the final database consists of five complete observations for each respondent, which are combined for the analysis [Rubin 1987 and Kennickell 1991].
The S&P 500 Index rose 15.8 percent in 2006 and 5.5 percent in 2007. The DJIA rose 16.3 percent in 2006 and 6.4 percent in 2007.
Influenced by high outliers, the mean amount of consumer debt outstanding is $151,996 and the mean debt burden is 48.5 percent.
The confidence interval estimate of the odds ratio—derived from the parameter estimates and their covariance matrix—indicates whether the explanatory variable has a significant impact at the 95 percent level of confidence. If the value 1.00 is within the interval, then the estimated coefficient is not significantly different from zero and the explanatory variable has no statistically significant impact on the event probability.
The original sample of 4,422 households is reduced to 4,167 for the logit analysis. Besides those eliminated because of the inability to classify their life cycle, four observations were excluded from the public database because of concerns about confidentiality.
The most common group in this sample—the older Mature Couple whose children are no longer at home—is in the constant.
For the logistic model, only the No Saving Rule measure of financial discipline is included. The variables Revolve and Late Pay are undefined for those households with no credit cards or loan payments.
Those households with no income are excluded because the debt burden is undefined, reducing the sample to 2,086 observations.
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Acknowledgements
We are grateful to the reviewers whose suggestions improved our paper.
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*Diane K. Schooley is Associate Dean and Professor of Finance at Boise State University. Her research interests include corporate governance, corporate finance, and consumer finance. She is a Certified Treasury Professional. She earned a Ph.D. in finance from the University of Colorado-Boulder. Debra Drecnik Worden is Professor of Business and Economics in the School of Business at George Fox University. She earned a Ph.D. in Economics from Purdue University. Her research interests include quantitative methods and consumer finance.
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Schooley, D., Worden, D. Fueling the Credit Crisis: Who Uses Consumer Credit and What Drives Debt Burden?. Bus Econ 45, 266–276 (2010). https://doi.org/10.1057/be.2010.25
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DOI: https://doi.org/10.1057/be.2010.25