Surveying Household Wealth: Part 3 – Credit Card Debt

This blog post is part three in a series analyzing the recently released Survey of Consumer Finances from the Federal Reserve. The SCF is a triennial survey of American families that offers insights into income, wealth, debt, and savings over time. Today’s post explores the data on credit card debt. Check out part one on precautionary savings and part two on retirement savings.

Recently released data from the Federal Reserve shows a decline in the percentage of Americans who had credit card debt between 2007 and 2010. The proportion of families carrying a balance on a credit card declined from 46.1% in 2007 to 39.4% in 2010. Fewer people were carrying balances, which means fewer people were racking up the interest from that debt. Sounds good, right?

Well, it turns out the picture is more complicated. While the median credit card balance declined, this decrease obscures demographic disparities in how some families fared. For example, while married couples, childless singles, and higher-wealth families saw their median balances decline, households headed by someone 75 or older, single parents, or those in the bottom wealth quartile saw a “substantial increase in the use of credit card borrowing.” More recent data from Demos’ 2012 National Survey on Credit Card Debt of Low-and Middle-Income Households finds that many lower-income households were relying on credit cards to cover the cost of basic living expenses like rent or mortgage payments, food, or utilities. So while more economically secure households were cutting back on credit borrowing, those with less security were scrambling to cover basic needs with increased borrowing. NPR reported on another explanation last week, “While it’s encouraging to see families carrying less debt, economists say the improvements don’t reflect good news, such as a surge of income for paying off bills. Rather, the decline shows lots of people filed for bankruptcy to clear out their old debts.” Viewing the 2007 and 2010 data in a broader context of consumer debt will help better decipher what drove the decline.

Last month, we hosted two experts on consumer debt who were able to provide some of that context.  Louis Hyman, a professor at Cornell and author of Borrow: The American Way of Debt, charted the rise in consumer credit during the twentieth century and highlighted key moments along the way that contributed to the proliferation of credit as a way of life for Americans. For example, he pointed out that credit became something of a substitute for income as wages stagnated in the second half of the twentieth century. He also identified deregulation and the rise in profitability of debt as contributors to our current situation. Janis Bowdler, from the National Council of La Raza, honed in on the disparate experience Americans have with credit markets based on race and income. For many years, black and Latino households didn’t have the same level of access to credit that helped their white counterparts build up middle class lifestyles. However, more recently, we see more democratic access to the credit market, but there are differences in the quality of the credit products. Demos data supports this: for example, a third of African-American and Latino households reported their credit cards had APRs above 20% versus a quarter of white households.

The inequality of the credit market spills into the fringe financial economy. Products like payday loans are high-interest and are often used by those who don’t have access to other credit sources. The SCF began collecting information on payday loans in 2007, in an effort to see how common these loans were and which demographics were more likely to use them. Unsurprisingly, they found that while 8.1% of families in the bottom net worth quartile had taken out a payday loan, almost no families with net worth above the median had done so.

Safe and affordable credit products help families make needed purchases and smooth over income fluctuations. Recognizing that the credit card market can be difficult for consumers to navigate, the Consumer Financial Protection Bureau has put credit cards as a top priority. Since last year, they’ve been responding to consumer complaints about credit cards and just this week launched a searchable database of the complaints. These investigations into the real-life struggles of consumers coupled with data from the SCF can help us to understanding why people use their credit cards, who carries debt on their cards, how credit card debt was affected the by the recession, and what is challenging to people about using credit cards. Merging SCF data with the anecdotal evidence the CFPB is compiling is one way to work on improving both the fairness and effectiveness of the credit market.