Paying Down Credit Card Debt: A Breakdown by Income and Age

In a previous post, we saw how U.S. households have been deleveraging according to educational levels.  In this post, we’ll see how income levels and age have been factors in the reduction of household credit card debt.

In an article in The Regional Economist, Juan Sanchez, senior economist at the Federal Reserve Bank of St. Louis, documented how the deleveraging process regarding credit card debt varied across households with different backgrounds.  This article also examined changes in the percentages of people in the various groups who had any credit card debt (called the “extensive margin”) and changes in the amounts of debt held by borrowers (called the “intensive margin”).  The article focused on the period 2007 through 2010.

Overall, mean credit card debt decreased 24 percent (from $3,538 to $2,791) during this period.  One-third of this drop was due to the intensive margin, with the other two-thirds of the drop due to the extensive margin.

Regarding income levels, Sanchez found that the middle quartiles (or the “middle class”) were responsible for most of the deleveraging.  The second and third income quartiles decreased credit card debt by 28 percent and 38 percent, respectively, while the poorest and richest quartiles decreased debt by about 14 percent.

With the exception of the third income quartile, changes in debt were mainly due to fewer households being in debt.  For example, the fourth (or richest) quartile saw 14.2 percent of its overall 14.6 percent decrease in credit card debt come from the extensive margin.  The third quartile, however, saw declines of 20.7 percent along the intensive margin and 17.4 percent along the extensive margin.

The changes in borrowing were very heterogeneous across age groups.  Households with a head of household aged 38 to 49 decreased credit card debt only 13 percent, while households with a head of household aged 18 to 37 decreased debt 28 percent.  Among older households, those with heads of household aged 50 to 62 decreased credit card debt by 27 percent, while those with heads of household older than 62 decreased debt by 33 percent.

The relative importance of the intensive and extensive margins for households deleveraging varied across households of different ages, too.  The extensive margin was more important for young households, for whom it accounted for more than 80 percent of the change.  In contrast, for the oldest households, the intensive margins accounted for more than 80 percent of the change.

Sanchez summarized that the data suggest several factors being behind the deleveraging.  The worsening of labor market conditions, in particular the higher risk of unemployment, may have accounted for some of the changes, especially among young households with lower income.  However, this factor seems unlikely to have accounted for the deleveraging by richer households headed by those older than 62, indicating that other factors, like shocks that increase the desire by older/richer households to save, may be necessary to understand the deleveraging.

• On the Economy:  The Deleveraging of U.S. Households
• The Regional Economist: Paying Down Credit Card Debt: A Breakdown by Income and Age
• In the Balance: Housing Crash Continues to Overshadow Young Families’ Balance Sheets