Risk and the democratization of credit cards

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.