Recent Developments in the Credit Card Market and the Financial Obligations Ratio

Abstract

This article argues that three important developments in the credit card market over the period account for most of the rise in credit card payments relative to income and played a strong role in the rise of the total financial obligations ratio (FOR). First, improvements in credit scoring technology and the advent of risk based pricing of credit card debt have increased the share of households particularly lower income households with a credit card. Second, in the 1990s, credit card interest rates began to vary with changes in broader market interest rates, which in turn led to an especially pronounced decline in credit card interest rates when, beginning in 2001, market rates turned sharply lower; the decline in credit card rates raised the demand for credit card debt. Finally, households have increased their use of credit cards as a convenient means of paying for daily purchases. The article also considers these findings in relation to the possible economic implications of the rise in the revolving credit FOR.