Credit Card Utilization and Consumption over the Life Cycle and Business Cycle
Nearly 80 percent of U.S. adults have a credit card, and more than half of them revolve their debt from month to month. Using a large sample of credit bureau data, this paper documents a tight link between available credit (the limit) and credit card debt, and then it offers a model-based interpretation of this linkage. Credit limits change frequently for individuals, increase rapidly on average as people age, and show large changes over the business cycle. Yet credit card debt changes nearly proportionately to credit and at about the same time, so the fraction of credit used is relatively stable over time. The authors build a life-cycle consumption model that includes the joint use of credit cards to pay directly for expenditures, to help smooth consumption against income shocks, and to borrow longer term (revolving indefinitely). The authors estimate the parameters of the model using several data sources, including a large credit bureau database and a new daily diary of consumer payment choices.