How important is variability in consumer credit limits?

Scott Fulford

No 14-8, Working Papers from Federal Reserve Bank of Boston

Abstract: Credit limit variability is a crucial aspect of the consumption, savings, and debt decisions of households in the United States. Using a large panel, this paper first demonstrates that individuals gain and lose access to credit frequently and often have their credit limits reduced unexpectedly. Credit limit volatility is larger than most estimates of income volatility and varies over the business cycle. While typical models of intertemporal consumption fix the credit limit, I introduce a model with variable credit limits. Variable credit limits create a reason for households to hold both high interest debts and low interest savings at the same time, since the savings act as insurance. Simulating the model using the estimates of credit limit volatility, I show that it explains all of the credit card puzzle: why around a third of households in the United States hold both debt and liquid savings at the same time. The approach also offers an important new channel through which financial system uncertainty affects household decisions.

Keywords: credit card puzzle; intertemporal consumption; precaution; credit limits; household finances (search for similar items in EconPapers)
JEL-codes: D14 D91 E21 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2010-06-01
New Economics Papers: this item is included in nep-ban, nep-dge, nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: How important is variability in consumer credit limits? (2015)
Working Paper: How important is variability in consumer credit limits? (2014)
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