Consumer credit card payment dynamics over the economic cycle

Christopher H. Wheeler

Journal of Credit Risk

Abstract: The frequency and degree to which consumers revolve credit card debt is a key driver of default risk on their accounts. Given the considerable discretion cardholders possess with respect to how they pay down their debt, we investigate the nature of payment behaviors and extent to which these vary with the business cycle. Using data on 1.8 million credit card accounts observed between 2008 and 2015, we find that although the state of the macroeconomy, as captured by various labor and housing market indicators, shows (in line with intuition) that recessionary periods are associated with more (and a higher degree of) revolving and less transacting/inactivity, the estimated magnitudes of these effects are extremely small. Indeed, they are roughly half the average magnitude of the seasonal effects we estimate from a set of month indicators. By far the most important predictor of future payment behavior is past behavior, suggesting that for the purposes of credit risk modeling and estimation, credit card holders can be segmented into relatively stable payer-type categories based on recent behavior.

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