Accounting for the Growth of Credit Card Debt

Peter Yoo

Much has been made recently about the growth and size of the credit card debt of American households. Consumer revolving credit outstanding, which includes credit card debt, totaled more than $480 billion in March of this year, growing at a 13 percent annual rate since the end of the last recession. Unfortunately, such aggregate data combine the behavior and circumstances of many households into a single statistic that is hard to interpret because they do not reveal which households, lower- or upper-income, contributed more to the growth of credit card debt. They also do not indicate which factor—the increasing number of households with credit cards or rising average balances per household—played a larger role in expanding the size of credit card debt. Without such information, inferences about the continued growth of credit card debt and its burden on households are hard to make.

The Surveys of Consumer Finances are a source of data collected from individual households that spans the period between 1983 and 1992—10 years that correspond roughly to the last complete business cycle. During that decade, consumer revolving credit outstanding grew at an average annual rate of 14 percent, which is faster than the current rate. The data from the surveys suggest, however, a more sanguine picture about the growth of credit card debt during the last business cycle, and perhaps for the current period as well.

The individual household data indicate that total credit card debt grew 243 percent between 1983 and 1992. The same data show that the number of households with credit cards increased only 25 percent during that time period, while the number of households grew 14 percent, suggesting a very small increase in the proportion of households with credit cards. In fact, the fraction of households with credit cards increased just 6 percentage points to 72 percent between 1983 and 1992. These figures indicate that only 9 percent to 26 percent of the growth of credit card debt was attributable to the increase in the number of households with credit cards. Because households with credit card experience are presumably more aware of the potential pitfalls of credit card ownership, the growth of credit card debt should therefore have been less troublesome.

Moreover, the household data indicate that the growth of credit card debt between 1983 and 1992 was due in large part to the households in the upper half of the income distribution. According to the data, upper-income households were more likely to have credit cards; in 1992, nearly 90 percent of households in the top half of the income distribution had credit cards, compared with 54 percent in the lower half. The upper-income households also held larger balances; the top half of the income distribution held nearly 74 percent of all credit card balances, with the top 10 percent of households accounting for 17 percent of all credit card debt.

The increase in the number of upper-income households holding credit cards, coupled with the increase in the average balances of upper-income households, accounted for 72 percent of the rise in credit card debt between 1983 and 1992. Again, presuming that upper-income households have the wherewithal to finance their credit card debt, the household data would appear to present a less pessimistic view of the growth of credit card debt.

Although it is clear that credit card debt has grown considerably during the current expansion, aggregate statistics do not provide enough information about why it has grown. Without such knowledge, it is difficult to assess if the debt will excessively burden individual households or if these households may actually know what they are doing.

Subscribe

Keep up with what’s new and noteworthy at the St. Louis Fed. Sign up now to have this free monthly e-newsletter emailed to you.

Subscription Options


Additional Fed Publications

Fed in Print: An index of the economic research conducted by the Fed.