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Credit card and payday loan borrowing: Evidence in the SCF 2010–2019

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  • Li, Tsung-Hsien

Abstract

Unsecured borrowing plays an important role for consumers in smoothing consumption. Each year, almost 40% of U.S. households have credit card debts and 4% borrow using a high-cost payday loan. This paper aims to explore the similarities and differences between both types of borrowers. Using the Survey of Consumer Finances (SCF) from 2010 to 2019, I document that: (1) credit card borrowers are middle-aged, upper-middle-class, with some college exposure, and financially literate; (2) payday loan borrowers are young, low-income and low-wealth, less educated, and less financially literate; and (3) payday loan borrowers lack the financial knowledge of inflation and risk diversification, but not of compound interest.

Suggested Citation

  • Li, Tsung-Hsien, 2022. "Credit card and payday loan borrowing: Evidence in the SCF 2010–2019," Economics Letters, Elsevier, vol. 221(C).
    • Handle: RePEc:eee:ecolet:v:221:y:2022:i:c:s0165176522003469
    DOI: 10.1016/j.econlet.2022.110872
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    References listed on IDEAS

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    1. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macro Perspective," IZA Discussion Papers 12966, Institute of Labor Economics (IZA).
    2. Tertilt, Michèle & Exler, Florian, 2020. "Consumer Debt and Default: A Macroeconomic Perspective," CEPR Discussion Papers 14425, C.E.P.R. Discussion Papers.
    3. Neil Bhutta & Paige Marta Skiba & Jeremy Tobacman, 2015. "Payday Loan Choices and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(2-3), pages 223-260, March.
    4. Kyoung Tae Kim & Jonghee Lee, 2018. "Financial literacy and use of payday loans in the United States," Applied Economics Letters, Taylor & Francis Journals, vol. 25(11), pages 781-784, June.
    5. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March.
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    7. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    8. Exler, Florian & Tertilt, Michèle, 2020. "Consumer Debt and Default: A Macro Perspective," IZA Discussion Papers 12966, Institute of Labor Economics (IZA).
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    More about this item

    Keywords

    Consumer credit; Credit card; Payday loan; Financial literacy;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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