Federal Reserve Bank of Boston
Credit card utilization and consumption over the life cycle and business cycle
The revolving credit available to consumers changes substantially over the business cycle, life cycle, and for individuals. We show that debt changes at the same time as credit, so credit utilization is remarkably stable. From ages 20–40, for example, credit card limits grow by more than 700 percent, and yet utilization holds steadily at around 50 percent. We estimate a structural model of life-cycle consumption and credit use in which credit cards can be used for payments, precautionary smoothing, and life-cycle smoothing, uniting their monetary and revolving credit functions. Our estimates predict stable utilization closely matching the individual, life-cycle, and business-cycle relationships between credit and debt. The preference heterogeneity implied by the different uses of credit cards drives our results. The revealed preference that some people with credit cards borrow at high interest, while others do not, suggests that around half the population is living nearly hand to mouth.
Cite this item
Scott L. Fulford & Scott Schuh, Credit card utilization and consumption over the life cycle and business cycle, Federal Reserve Bank of Boston, Working Papers 17-14, 01 Sep 2017.
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
Keywords: credit cards; life cycle; consumption; saving; precaution; buffer stock
This item with handle RePEc:fip:fedbwp:17-14
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