Most Cardholders Are Always Carrying Credit Card Debt
The report, entitled “Consumer Revolving Credit and Debt over the Life Cycle and Business Cycle,” analyzed 5% of all U.S. credit report accounts from 2000 to 2014 to determine how Americans’ relationship with credit cards changes over time.
They found only 35% of credit cardholders aged 25 to 50 pay off their balances each month. The overwhelming majority, known as “revolvers,” carry a balance every month. Carrying such balances generally results in paying high interest charges.
For most Americans, this borrowing begins between the ages of 20 and 30. During this time, credit card limits increase about 450% and debt rises 300%.
Credit cards can become a substitute for savings for young people.
“People in their 20s don’t seem to save much,” said Scott Fulford, a Boston College professor who wrote the study with Scott Schuh, director of the Boston Fed’s Consumer Payments Research Center. “Well, maybe they’re not saving very much because the way they’re ‘saving’ is just by getting higher credit limits. That provides the funds for emergencies that they need,” Fulford said.
Even as Americans age, they still rely on their credits cards. The average 20-year-old is using more than half of their available credit, and 50-year-olds use about 40%.
Once cardholders do reach the age of 50, credit card borrowing tapers, but 45% of 70-year-olds carry a balance each month. Even the typical 80-year-old carries a $600 balance. The study concludes “the median person is always borrowing, although at the end of life she is not borrowing much.”
The study also showed most Americans are apt to charge more in good economic climates than recessions. The reason is that spending does not seem influenced by the economy. Instead, borrowing seems to be driven by credit limits. When banks offer consumers higher limits, they use it, and banks are always adjusting how much credit they give cardholders. From 2000 to 2008, the average credit card limit rose 40%, then decreased 40% in 2009, the most recent recession.
Revolvers are most affected by credit increases. When these cardholders are offered a 10% credit limit increase, their debt increases by 9.99%. This study indicates most Americans are inclined to use every penny their credit card issuer offers.