Credit Card Debt and Default over the Life Cycle

Paula Lopes

Journal of Money, Credit and Banking, 2008, vol. 40, issue 4, pages 769-790

Abstract: This paper solves an empirically parameterized model of life cycle consumption, which allows for uncollaterized borrowing and the possibility of default. The simulation results show that: (i) "social "stigma"" and credit limit have a very large impact on default rates; (ii) education level also has a significant effect on the probability of default, namely, through differences in the shape of lifetime labor income profiles; and (iii) the response of simulated default rates to labor income shocks is determined by the nature of labor income uncertainty (temporary versus permanent). Additionally, the model generates simultaneous consumer holdings of credit card debt and liquid assets. Copyright (c) 2008 The Ohio State University.

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