Convenience or Necessity? Understanding the Recent Rise in Credit Card Debt

Convenience or Necessity? Understanding the Recent Rise in Credit Card Debt

download (7)Kathleen W. Johnson,Economist
Division of Research and Statistics
Board of Governors of the Federal Reserve System

Abstract
Economists disagree whether the recent increase in credit card debt has been detrimental to U.S. households.However,many rely on a measure of revolving credit published by the Federal Reserve, which captures transactions in which a credit card is used because of its advantages over cash or a check.An increase in debt stemming from such convenience use likely would not signal greater financial vulnerability for households.In this paper,I present evidence that some of the significant increase in both the level of credit card debt and its growth from 1992 to 2001 was due to convenience use.
The growth of credit card debt has been brisk over the past decade.Between 1993 and 2003 revolving consumer credit,most of which consists of credit card debt,grew at an annual rate of 9.2 percent,whereas disposable personal income grew only 5.2 percent.As a result,the ratio of revolving credit to income increased to 2.7 percentage points,to 8.9 percent.Despite their agreement about the growth of credit card debt,many analysts differ on the question of whether this growth is detrimental to the U.S. consumer.Academic researchers have consistently found that rapid credit t growth signals rapid future consumption growth (see e.g.,Maki, 2000;Ludvigson,1999;Bacchetta and Gerlach,1997;Carroll and Dunn,1997).

Convenience or Necessity? Understanding the Recent Rise in Credit Card Debt

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