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The Unprecedented Fall in U.S. Revolving Credit

Gajendran Raveendranathan and Georgios Stefanidis

Department of Economics Working Papers from McMaster University

Abstract: Revolving credit in the U.S. declined drastically in the last decade after several years of upward trending growth. We show that the Ability to Pay provision of the Credit CARD Act of 2009, which places restrictions on credit card limits, accounts for this decline. Extending a model of revolving credit to analyze this policy, we account for changes in credit statistics by income and age. Although the goal was consumer protection, the policy has led to welfare losses. Even consumers with time inconsistent preferences who could benefit from tighter credit constraints are worse off. An alternative policy considered by policymakers - an interest rate cap - improves welfare.

Keywords: revolving credit; credit limits; Ability to Pay; Credit CARD Act (search for similar items in EconPapers)
JEL-codes: E21 E44 E65 G28 G50 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2020-05
New Economics Papers: this item is included in nep-ban, nep-mac and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2020-05

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