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Financial Distress around the Great Recession


Tuesday, October 11, 2016
credit card debt and financial distress
Thinkstock/max kegfire

U.S. households decreased their credit card debt substantially between 2007 and 2013. If this deleveraging was caused by banks tightening debt limits, as has been often suggested, then household financial distress should have gone up. However, financial distress actually decreased during this period, according to a recent Economic Synopses essay.

Research Officer and Economist Juan Sanchez and former Technical Research Associate Helu Jiang examined the period 2004-13, looking at two aspects of deleveraging:

  • The share of heads of households carrying a positive balance after their most recent credit card payment
  • The average debt per head of household for households with a positive balance after their most recent credit card payment

The authors found that the share carrying balances fell from 44 percent in 2007 to 34 percent in 2013. They also noted that the average debt among those with balances dropped from $7,328 in 2007 to $5,589 in 2013.

They also examined household financial distress over the period 2004-15 via two definitions:

  • High credit, or the fraction of households using all credit available from their credit cards
  • Delinquent, or the fraction of households with credit card payments that were 90 days or more late

Sanchez and Jiang found that the measures showed similar levels of financial distress. They also followed similar patterns, remaining relatively constant from 2004 through 2007, then declining steadily. For the period 2008-15, distressed household share declined 41 percent (from 8.3 percent to 4.9 percent) as measured by delinquency and 53 percent (from 7.6 percent to 3.6 percent) as measured by high credit.

The authors suggested that post-crisis deleveraging did not drive more households to financial distress. One possible reason they gave for the deleveraging without distress is that households chose to pare down debt in light of the recession, rather than being forced to.

Sanchez and Jiang wrote: “Overall, the analysis suggests that a contraction in credit demand may have played a role in the deleveraging. Credit supply stories could have also played a role. However, the tightening must be such that it does not imply an immediate increase in household financial distress, which would be counterfactual to the data presented previously.”

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Posted In Financial  |  Tagged juan sanchezhelu jiangdeleveragingcredit cardsgreat recessionfinancial distress