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Extra Credit: The Rise of Short-term Liabilities


Kristie M. Engemann , Michael T. Owyang
Wednesday, October 1, 2008

According to the 2004 Survey of Consumer Finances (SCF), the percentage of families holding debt rose from 72.3 percent in 1989 to 76.4 percent in 2004. Among families holding debt, the median value of the debt more than doubled during that time from $22,000 to $55,300 (in 2004 dollars). These numbers reflect both a rise in collateralized debt (e.g., mortgages) and uncollateralized debt (e.g., credit cards).

This shift toward more debt appears to have long-term ramifications for the U.S. economy, as evidenced by the growing number of personal bankruptcies over recent decades. Perhaps playing a role in this rise is the increase in debt accumulated via credit cards and payday loans.


Paper or Plastic?

In 1989, a total of 55.8 percent of American families owned at least one credit card; in 2004, a total of 74.9 percent owned at least one card. According to several economic studies, the characteristics of credit card holders have changed over time to include people who are riskier for the lenders. For example, a higher percentage of single people and renters now have a credit card. Also, workers with less job seniority, lower incomes and unskilled jobs are now more likely to hold a credit card. Attitudes toward borrowing have changed as well; for example, people increasingly borrow to finance things like vacations and living expenses.

Although credit card usage has increased across the income spectrum, the largest increases occurred among lower-income groups. (See the accompanying table.) Among those in the lowest 20 percent of the income distribution, the fraction with credit card debt nearly doubled between 1989 and 2004, and their median credit card debt increased to $1,000 from $400. For those in the next lowest 20 percent, the fraction with credit card debt increased by 51 percent, and their median debt doubled to $1,800.

Between 1992 and 2006, the total dollar amount of credit card loans nearly tripled, while the dollar amount of loans that are 90 days delinquent more than tripled. At the end of 2006, FDIC-insured institutions had $385 billion in credit card loans to individuals, and $6.5 billion were past due 90 days or more (1.7 percent of the total).


What's in the Balance?

In addition to carrying a balance, borrowers do not appear to rush to pay off their credit cards. Several economists have found that some consumers carry credit card balances even though they have sufficient funds in the bank to pay off their high-interest debt. Economist Irina Telyukova found that about 28 percent of those surveyed had at least $500 both in credit card debt and liquid assets. This group held an average credit card debt of $5,766 and an average of $7,237 in liquid assets. Furthermore, the average interest rate on the debt was 13.7 percent, compared with a rate of only about 1 percent on their liquid assets.

Telyukova hypothesized that households keep liquid assets for payments where cash is required. While many of these expenses are predictable, others may arise in an emergency. To protect themselves in the event such a case arises, households may forgo paying off credit card debt in order to keep cash available.


I Want It All, and I Want It Now

Another increasingly common form of short-term debt is the payday loan. According to the Center for Responsible Lending (CRL), from 2000 to 2003, the industry quadrupled in size to $40 billion. Payday loans are designed to lend small amounts of money for short amounts of time, usually two weeks. Typical interest rates for two weeks can range from 15 to 18 percent, which translates into about a 400 percent annual interest rate. Payments are due on the borrower's payday, but the loan may be renewed with additional fees.

Similar to credit cards, payday loans have become popular among lower-income households. A CRL report asserts that 90 percent of lenders' revenue comes from borrowers who have five or more loans per year. To demonstrate, an average borrower renews a loan eight times and ends up paying back $793 for a $325 loan. The CRL estimates that Americans paid $4.2 billion in payday loan fees in 2005.

Economists Paige Skiba and Jeremy Tobacman found that applicants for payday loans from a particular lender in Texas had an average monthly income of $1,699 and $235 in their checking account. Additionally, 77 percent of the applicants were black or Hispanic and 62 percent were women. The results of the study suggest that access to loans can be habit-forming. Within one year, a consumer whose first-time application for a payday loan was approved would apply for another loan an average of 8.4 more times; in comparison, a consumer whose first-time application was rejected would apply 1.8 more times on average.


You Get What You (Don't) Pay For

Americans appear willing to trade substantial interest payments for access to short-term credit markets. But does this new behavior have detrimental long-term effects? According to a study by economist Michelle White, an increase in the amount of revolving debt (for example, credit card debt) per household coincided with an increase in personal bankruptcy filings from the 1980s to 2005. There were 5.4 times more bankruptcies in 2004 than in 1980, and revolving debt per household was 4.6 times larger in 2004 than in 1980.

White discussed other possible explanations for the increase in bankruptcy filings, such as job loss and medical bills. These types of adverse events, however, have not increased since 1980. She concluded, therefore, that the rise in personal bankruptcies can be attributed in large part to the rise in credit card debt.

Similarly, the payday loan applicants in Skiba and Tobacman's study were six times more likely to file for bankruptcy between January 2001 and June 2005 than the general population in Texas.

Credit cards and payday loans can be convenient for some people as a means to borrow money for a relatively short period of time. However, the recent rise in short-term liabilities - especially by lower-income households - may have long-term implications for the economy, as demonstrated by the apparent correlation with bankruptcy filings.


Credit Card Debt by Income Distribution

Percentage with credit card debt Median credit card debt
(2004 dollars)

1989 2004 Difference 1989 2004 Difference
All families 39.7 46.2 6.5 $1,300 $2,200 $900
Percentiles of income
< 20 percent
15 29.1 14.1 $400 $1,000 $600
20 - 39.9 percent 28.2 42.5 14.3 $900 $1,800 $900
40 - 59.9 percent 48.8 55 6.2 $1,200 $2,200 $1,000
60 - 79.9 percent 57.4 56.2 -1.2 $1,500 $3,000 $1,500
80 - 100 percent 49 48.1 -0.9 $2,600 $3,400 $800

SOURCE: 2004 Survey of Consumer Finances. See

This article was adapted from "Extra Credit: The Rise of Short-term Liabilities," which was written by Kristie M. Engemann, a research analyst, and Michael T. Owyang, an economist, both of the Federal Reserve Bank of St. Louis, and was published in the April 2008 issue of The Regional Economist, a St. Louis Fed publication.