Discussion and Implications

This thesis has provided valuable insights about the major factors affecting the level of credit card debt in the US. We define age, marital status, income, real estate ownership status, favorable and neutral attitude towards credit, and high self-reported financial knowledge as main and statistically significant contributors to the level of the credit card debt for US families.

Based on the analysis results, credit card debt is decreasing with age. This is consistent with our expectations based on the life-cycle hypothesis (Modigliani 1986). The negative relationship between age and credit card debt has been also established in a number of empirical studies: Bird et. al (1997) concluded that young households rely more on credit due to the lack of financial back-ups, such as stocks or savings; Mandell (1973) attributed higher credit card debt among young families to the lower financial knowledge; Lown and Ju (1992) concluded that younger consumers tend to hold bigger outstanding credit card balances to stimulate their consumption; Bertaut and Haliassos (2004) also pointed at the higher credit card debt among young households. Marital status is also significant

and credit card debt is higher for married families. This relationship is logical due to the higher joint expenses of larger families. It is consistent with the expectations based on the previous works (Bird et. al (1997); Chien and Devaney (2001)). Overall, this result fits the classic economic framework and life-cycle assumptions.

An increase in income is associated with the reduction of credit card debt. It is consistent with the idea that households who face higher budget constraints have more direct funds to supply their consumption. The negative relationship between income and credit card debt has been established in earlier empirical researches about US households (Bird et. al (1997); Mandell (1973); Bertaut and Haliassos (2004)). The significance of income in determining the credit card debt is consistent with findings of Kim and Devaney (2001), however they concluded that increase in income is positively correlated with the credit card debt. The significance and direction of the effect of both economic factors (income and real estate possession) are matching the findings of the original paper by Chien and Devaney (2001). The effect of income on the credit card debt is crucial because it conforms with the idea that credit card dept is swiping the vulnerable low-income portion of the US population (Bird et. al (1997)). This fact can be alarming due to the higher probability of low-income families to start lagging behind regular payments and fall into delinquencies.

Another significant determinant of credit card debt is the family’s attitude towards credit.

The significance of attitude alongside with other factors is consistent with the findings of Lown and Ju (1992). They indicated the attitude towards credit to be the most influential predictor of credit card borrowing behavior, arguing that a positive attitude towards credit empowers more rational credit practices. Credit card debt is increasing for families with favorable and neutral attitudes towards credit, which conforms with previous findings (Chien and Devaney (2001); Godwin (1997); Kim and Devaney (2001)). Overall, the attitude towards credit has remained an important predictor of the credit card debt despite of the Global Financial Crisis of 2007 – 08.

The highest self-confidence in personal finances is predicted to decrease the household’s credit card debt. This aligns with the finding that consumers learn in the credit market and start decreasing outstanding debts (Agarwal et al. 2008). Many researchers highlighted the importance of financial literacy and its impact on credit behavior (Mandell (1973), Lusardi and Mitchell (2007), Tae Kim and Yuh (2018), Thaler (2008),

Ludlum et al. (2012)). Although there has been a concern that households might overestimate their self-perceived financial knowledge (Lusardi and Mitchell 2007) it does not seem to be the case for the SCF correspondents since high self-confidence in one’s finances decreases the credit card debt. The decline in credit card debt associated with higher perceived financial knowledge seems to be contradictory to the findings of Gorbachev and Luengo-Prado (2016). This indicates a potential for further research which would focus on the credit card debt puzzle incorporating more explanatory factors.

Throughout the thesis, I have been emphasizing that the importance and value-added of my research are greatly supplemented by the vast swings in consumer preferences throughout the last two decades. Many studies based on the SCF data were conducted in late ’90s and early ’00s. Additionally, financial literacy variables were introduced only in the latest survey conducted. As far as I am concerned, this thesis is one of the first attempts to study factors affecting the level of credit card debt based on the SCF data which incorporates the financial literacy variables. It is a valuable contribution, because we have seen the effect of self-reported financial literacy on the level of credit card debt, which confirms the importance of educating people to stimulate more rational credit practices, and have evaluated it jointly with other factors.

The results of this thesis shed light on the main factors behind the increasing credit card debt for US families. It also can help to outline the regulatory framework for policymakers dealing with credit card debt regulations in the US. I have shown in my analysis that nowadays, the credit card market in the US is a sophisticated financial structure, which involves many parties ranging from average customers to the biggest US banks. It goes without saying that prosperous, wealthy, and educated families impose little to nothing threat to the credit card market: they use credit cards as a convenient mean of payment and credit when their incomes are secure and stimulate the market, by providing the credit card issuers with new funds. However, ease of getting a credit card account made this financial instrument available to the more vulnerable part of the population: young, uneducated, and low-income families, who can over-use credit cards and rely greatly on them to stimulate consumption. The inability to pay the current balances or lack of knowledge about the financial markets can lead to accumulating debt, eventually leading to delinquencies. If banks greatly rely on these deceptive consumers, they can incur losses during the recession, when wealthy households would decrease the use of credit, whereas unsecured families would not be able to pay off their obligations.

It is crucial to focus on actions that can be undertaken to ensure that this market is functioning smoothly and to avoid any potential market failures. One measure that can be implemented is the investment in the financial literacy of the population. Banks can be ordered to keep consumers updated about the health of their credit card accounts via issuing regular credit card balances statements. In case a consumer starts to be lagging behind regular payments, banks can create incentives for them to start repaying the debt by informing them about potential accumulating losses. On a more general level, supplementary educational courses can be established to introduce consumers to the credit card market and explain which payment strategies are the best to avoid accumulating debt. These programs can be promoted in colleges and universities to target young families, who greatly rely on credit cards. Additionally, more rigorous policies to issuing credit cards can be applied to the banks to avoid the spread of the credit card industry to the vulnerable part of the population: consumers can be asked to provide banks with more detailed income statements, thus proving their reliability as debtors.