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Risk and the democratization of credit cards

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The dramatic rise in credit card charge-offs in the midst of a vigorous expansion suggests that bank card borrowers have become inherently riskier. This paper investigates how the mix of credit card borrowers has changed in recent years, and how those changes affect delinquency risk. The new card holders seem riskier along several dimensions. They tend to earn less, and as a result, they owe more relative to income. This rise in debt burdens almost certainly contributed to the rise in charge-offs, since debt burdens are a key determinant of delinquency risk. Card holders are also more likely to work at relatively unskilled blue collar jobs. This occupation shift may also have contributed to the rise in charge-offs, since delinquency rates are higher in these occupations, perhaps because income is more cyclical. Some of the personal characteristics and attitudes that have changed, such as marital status and job tenure, also imply somewhat higher risk.

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  • Sandra E. Black & Donald P. Morgan, 1998. "Risk and the democratization of credit cards," Research Paper 9815, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednrp:9815
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    References listed on IDEAS

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    1. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family Finance in the U.S.: Recent Evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 83(1), pages .1-24, January.
    2. Elizabeth Laderman, 1996. "What's behind problem credit card loans?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul19.
    3. Donald P. Morgan & Ian Toll, 1997. "Bad debt rising," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 3(Mar).
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    Cited by:

    1. Sougata Kerr & Lucia Dunn & Stephen Cosslett, 2004. "Do Banks Use Private Information from Consumer Accounts? Evidence of Relationship Lending in Credit Card Interest Rate Heterogeneity," Working Papers 04-08, Ohio State University, Department of Economics.
    2. Elizabeth Schmitt, 2000. "Does rising consumer debt signal future recessions?: Testing the causal relationship between consumer debt and the economy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 28(3), pages 333-345, September.
    3. John Whitley & Richard Windram & Prudence Cox, 2004. "An empirical model of household arrears," Bank of England working papers 214, Bank of England.
    4. Kerr, Sougata & Dunn, Lucia, 2008. "Consumer Search Behavior in the Changing Credit Card Market," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 345-353.
    5. Lucia Dunn & TaeHyung Kim, 1999. "Empirical Investigation of Credit Card Default," Working Papers 99-13, Ohio State University, Department of Economics.

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    Keywords

    Credit cards; Risk;

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