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Recent developments in the credit card market and the financial obligations ratio

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Abstract

This article argues that three important developments in the credit card market over the period account for most of the rise in credit card payments relative to income and played a strong role in the rise of the total financial obligations ratio (FOR). First, improvements in credit scoring technology and the advent of risk based pricing of credit card debt have increased the share of households particularly lower income households with a credit card. Second, in the 1990s, credit card interest rates began to vary with changes in broader market interest rates, which in turn led to an especially pronounced decline in credit card interest rates when, beginning in 2001, market rates turned sharply lower; the decline in credit card rates raised the demand for credit card debt. Finally, households have increased their use of credit cards as a convenient means of paying for daily purchases. The article also considers these findings in relation to the possible economic implications of the rise in the revolving credit FOR.

Suggested Citation

  • Kathleen W. Johnson, 2005. "Recent developments in the credit card market and the financial obligations ratio," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 91(Aut), pages 473-486.
    • Handle: RePEc:fip:fedgrb:y:2005:i:aut:p:473-486:n:v.91no.4
    DOI: 10.17016/bulletin.2005.91-4
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    File URL: http://www.federalreserve.gov/pubs/bulletin/2005/autumn05_lead.pdf
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    Cited by:

    1. Fenaba Addo, 2014. "Debt, Cohabitation, and Marriage in Young Adulthood," Demography, Springer;Population Association of America (PAA), vol. 51(5), pages 1677-1701, October.
    2. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    3. Adkisson, Richard V. & Saucedo, Eduardo, 2012. "Emulation and state-by-state variations in bankruptcy rates," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 400-407.
    4. Durkin, Thomas A. & Ord, Keith & Walker, David A., 2010. "Long-run credit growth in the US," Journal of Economics and Business, Elsevier, vol. 62(5), pages 383-400, September.
    5. Oh, Joon-Hee & Johnston, Wesley J., 2014. "Credit lender–borrower relationship in the credit card market – Implications for credit risk management strategy and relationship marketing," International Business Review, Elsevier, vol. 23(6), pages 1086-1095.

    More about this item

    Keywords

    Credit cards; Households - Economic aspects;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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