Credit Card Access and the Unemployed

Post date: Mar 19, 2013 5:37:08 PM

In my most recent paper (which is also available here) I provide evidence (and cite existing evidence) that there are 3 channels through which the unemployed can use on-demand credit such as credit cards to smooth consumption:

1. Borrowing

2. Rolling over or transferring balances

3. Defaulting

Using new data from the SCF, I show that there are a considerable number of the unemployed who borrow significantly but have essentially zero liquid assets. In the SCF, they ask respondents what their most recent charges are on their credit card, they ask what the employment status of the person is as of the interview date, and they also ask what balance is held in their savings accounts (the PSID uses a measure of liquid assets that includes CDs, money market funds, short term T-bills, etc. but the same facts essentially hold -- the unemployed do not have much savings-- see also Gruber's (2001) article on the wealth of the unemployed). The table below is an excerpt from the paper.

The first table is the bankcard charges in the most recent month by unemployed and employed households. The unemployed charged roughly $500 worth of expenditures on their credit cards. In fact, 45% of the unemployed had some type of credit charges. Of course, this does not imply that 45% were borrowing to smooth consumption-- some may simply be making convenience purchases or they may have enough income to pay off the credit balance. The last line shows that among those who were unemployed and making new charges on their credit card, 43% had essentially no liquid wealth (their savings totaled less than $500).

Table 1: Bankcard Charges of the Unemployed by Liquid Assets (in 2010 $).

Table 2 which is the bankcard balances of the unemployed says that 37% of unemployed are rolling over balances. You can see that among the households who are unemployed and rolling over their balance, 68% have essentially no liquid wealth!

Key Question: Is this enough to make a difference in the aggregate? I think the other 2 channels mattered quite a lot for the most recent recession, in particualr the 3rd channel which is default. I have a paper that argues that default alone can explain a nontrivial fraction of unemployment.