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The Unprecedented Fall in U.S. Revolving Credit

Author

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  • Gajendran Raveendranathan
  • Georgios Stefanidis

Abstract

Revolving credit in the U.S. declined drastically in the last decade after several years of upward trending growth. We show that the Ability to Pay provision of the Credit CARD Act of 2009, which places restrictions on credit card limits, accounts for this decline. Extending a model of revolving credit to analyze this policy, we account for changes in credit statistics by income and age. Although the goal was consumer protection, the policy has led to welfare losses. Even consumers with time inconsistent preferences who could benefit from tighter credit constraints are worse off. An alternative policy considered by policymakers - an interest rate cap - improves welfare.

Suggested Citation

  • Gajendran Raveendranathan & Georgios Stefanidis, 2020. "The Unprecedented Fall in U.S. Revolving Credit," Department of Economics Working Papers 2020-05, McMaster University.
    • Handle: RePEc:mcm:deptwp:2020-05
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    Cited by:

    1. Tertilt, Michèle & Exler, Florian & Livshits, Igor & MacGee, Jim, 2020. "Consumer Credit with Over-Optimistic Borrowers," CEPR Discussion Papers 15570, C.E.P.R. Discussion Papers.
    2. Exler, Florian & Hansak, Alexander, 2021. "Naïve Consumers and Financial Mistakes," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242359, Verein für Socialpolitik / German Economic Association.
    3. Raveendranathan, Gajendran, 2020. "Revolving credit lines and targeted search," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).

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    More about this item

    Keywords

    revolving credit; credit limits; Ability to Pay; Credit CARD Act;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G50 - Financial Economics - - Household Finance - - - General

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