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How important is variability in consumer credit limits?


  • Scott Fulford

    (Boston College)


Credit limit variability is a crucial aspect of the consumption, savings, and debt decisions of households in the United States. Using a large panel this paper first demonstrates that individuals gain and lose access to credit frequently and often have their credit limits reduced unexpectedly. Credit limit volatility is larger than most estimates of income volatility and varies over the business cycle. While typical models of intertemporal consumption fix the credit limit, I introduce a model with variable credit limits. Variable credit limits create a reason for households to hold both high interest debts and low interest savings at the same time since the savings act as insurance. Simulating the model using the estimates of credit limit volatility, I show that it explains all of the credit card puzzle: why around a third of households in the United States hold both debt and liquid savings at the same time. The approach also offers an important new channel through which financial system uncertainty can affect household decisions.

Suggested Citation

  • Scott Fulford, 2010. "How important is variability in consumer credit limits?," Boston College Working Papers in Economics 754, Boston College Department of Economics, revised 01 May 2014.
  • Handle: RePEc:boc:bocoec:754
    Note: Previously circulated as "What credit card puzzle? Precaution, variable debt limits, and what we can learn from the small debts of poor people"

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    References listed on IDEAS

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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. More on the credit card puzzle
      by Economic Logician in Economic Logic on 2010-10-13 19:44:00


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    1. repec:gam:jsusta:v:9:y:2017:i:9:p:1563-:d:110715 is not listed on IDEAS
    2. Fulford, Scott L., 2015. "The surprisingly low importance of income uncertainty for precaution," European Economic Review, Elsevier, vol. 79(C), pages 151-171.
    3. Carolina Laureti, 2017. "Why do Poor People Co-hold Debt and Liquid Savings?," Working Papers CEB 17-007, ULB -- Universite Libre de Bruxelles.
    4. Olga Gorbachev & María José Luengo-Prado, 2016. "The Credit Card Debt Puzzle: The Role of Preferences, Credit Risk, and Financial Literacy," Working Papers 16-06, University of Delaware, Department of Economics.
    5. Silva, Mario, 2017. "New monetarism with endogenous product variety and monopolistic competition," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 158-181.
    6. Athreya, Kartik & Sánchez, Juan M. & Tam, Xuan S. & Young, Eric R., 2012. "Bankruptcy and delinquency in a model of unsecured debt," Working Papers 2012-042, Federal Reserve Bank of St. Louis, revised 22 Dec 2016.
    7. Carolina Laureti, 2015. "The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs?," Working Papers CEB 15-021, ULB -- Universite Libre de Bruxelles.
    8. Stephanie Moulton & Donald Haurin & Samuel Dodini & Maximilian D. Schmeiser, 2016. "How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households," Working Papers wp351, University of Michigan, Michigan Retirement Research Center.
    9. Fulford, Scott L. & Schuh, Scott, 2015. "Consumer revolving credit and debt over the life cycle and business cycle," Working Papers 15-17, Federal Reserve Bank of Boston.

    More about this item


    credit; debt; liquidity; credit card puzzle; financial uncertainty;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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