Not only are more American families in debt, but the median value of the debt more than doubled between 1989 and 2004. Credit cards and payday loans are two of the favorite tools for digging the hole deeper.Credit

Kristie M. Engemann

Michael T. Owyang

English

Research Papers in Economics

T
he average American is carrying more 
debt than ever.  According to the 2004 
Survey of Consumer Finances (SCF), the 
percentage of families holding debt rose 
from 72.3 percent in 1989 to 76.4 percent 
in 2004.  Among families holding debt, the 
median value of the debt more than doubled 
during that time from $22,000 to $55,300 
(in 2004 dollars).  These numbers reflect 
both a rise in collateralized debt (e.g., mort-
gages) and uncollateralized debt (e.g., credit 
cards).  During the same period, median 
family income increased by only 12.8 per-
cent to $43,100.  
This shift toward more debt appears 
to have long-term ramifications for the 
U.S. economy, as evidenced by the grow-
ing number of personal bankruptcies over 
recent decades.  Perhaps playing a role in 
this rise is the increase in debt accumulated 
via credit cards and payday loans.
Paper or Plastic?
In 1989, a total of 55.8 percent of American 
families owned at least one credit card; in 
2004, a total of 74.9 percent owned at least 
one card.  Over time, the characteristics of 
credit card holders have changed to include 
people who are riskier for the lenders.1  For 
example, a higher percentage of single people 
and renters now have a credit card.  Also, 
workers with less job seniority, lower incomes 
and unskilled jobs are now more likely to 
hold a credit card.  Attitudes toward borrow-
ing have changed as well; for example, people 
increasingly borrow to finance things like 
vacations and living expenses.
While credit card usage has increased 
across the income spectrum, the largest 
increases occurred among lower-income 
groups.  (See the accompanying table.)  
Among those in the lowest 20 percent of the 
income distribution, the fraction with credit 
card debt nearly doubled between 1989 and 
2004, and their median credit card debt 
increased to $1,000 from $400.  For those in 
the next lowest 20 percent, the fraction with 
credit card debt increased by 51 percent, and 
their median debt doubled to $1,800.2
Data from the Federal Deposit Insurance 
Corp. (FDIC) provide some perspective as to 
the magnitude of the credit card industry.3  
Between 1992 and 2006, the total dollar 
amount of credit card loans nearly tripled 
while the dollar amount of loans that are 90 
days delinquent more than tripled.  At the 
end of 2006, FDIC-insured institutions had 
$385 billion in credit card loans to individu-
als, and $6.5 billion were past due 90 days or 
more (1.7 percent of the total).
What’s in the Balance?
In addition to carrying a balance, bor-
rowers do not appear to rush to pay off their 
credit cards.  Several economists have found 
that some consumers carry credit card bal-
ances even though they have sufficient funds 
in the bank to pay off their high-interest 
debt.  Using data from the 2001 SCF and the 
2000-2002 Consumer Expenditure Survey, 
economist Irina Telyukova categorized 
households into three groups: borrowers, 
savers, and borrowers-and-savers.  She found 
that about 28 percent of those surveyed had 
at least $500 both in credit card debt and 
liquid assets.  This group—the borrowers-
and-savers—held an average credit card debt 
of $5,766 and an average of $7,237 in liquid 
assets.  Furthermore, the average interest rate 
on the debt was 13.7 percent and only about  
1 percent on their liquid assets.
To explain why some continued to hold 
both high-interest debt and liquid assets, 
Telyukova hypothesized that households 
keep liquid assets for payments where cash 
is required.4  While many of these expenses 
are predictable, others may arise in an emer-
gency.  To protect themselves in the event 
such a case arises, households may forgo 
paying off credit card debt in order to keep 
cash available.5
I Want It All, and I Want It Now
Another increasingly common form of 
short-term debt is the payday loan.  From 
2000 to 2003, the industry quadrupled 
in size to $40 billion.6  Payday loans are 
designed to lend small amounts of money 
for short amounts of time, usually two 
weeks.  Typical interest rates for two weeks 
can range from 15 to 18 percent, which 
translates into about a 400 percent annual 
interest rate.  Payments are due on the bor-
rower’s payday but may be renewed with 
additional fees.
Similar to credit cards, payday loans 
have become popular among lower-income 
households.  A Center for Responsible Lend-
ing (CRL) report argues that 90 percent of 
lenders’ revenue comes from borrowers who 
have five or more loans per year, not one-
time borrowers.7  To demonstrate, an aver-
age borrower renews a loan eight times and 
Extra Credit: The Rise of Short-term Liabilities
debt
By Kristie M. Engemann and Michael T. Owyang
“  Americans appear willing 
to trade substantial interest 
payments for access to  
short-term credit markets.”
12   The Regional Economist  |  April 2008EndnotEs
 1  See Bucks, Kennickell and Moore (2006) and Black 
and Morgan (1999) for a description of changes in 
credit card holders.
 2  Note that the numbers are only for families with 
credit card balances.
 3  The data include all institutions insured by the FDIC.  
See www2.fdic.gov/sdi/sob/.
 4  “Cash” here refers to cash and similar payments,  
e.g., check, debit card.
 5  For the average household in each group, the bor-
rower-and-saver kept 3.4 times more, the borrower 
kept 0.1 times more and the saver kept 10 times more 
money in the bank than needed for cash-only goods 
in a typical month.
 6  From the Center for Responsible Lending.  See www.
responsiblelending.org/issues/payday/briefs/page.
jsp?itemID=29557924.
 7  See www.responsiblelending.org/pdfs/rr012- 
Financial_Quicksand-1106.pdf.
 8  The authors obtained data from a provider of  
financial services.
 9  New bankruptcy laws effective in October 2005 
made it harder for consumers to file for Chapter 7 
bankruptcy, which caused a sharp increase in the 
bankruptcy rate in the first three quarters of 2005 
and a sharp decline in 2006.
 1 0   To obtain a loan, the applicant’s credit score must  
reach a certain threshold.  Of first-time applicants,  
99.6 percent below that threshold were rejected, and 
96.9 percent above the threshold were accepted.   
Because the difference between a consumer whose  
application was barely accepted and one whose  
application was barely rejected is very small, the 
authors focused their analysis on those near the  
acceptance threshold.
 11   Chapter 7 bankruptcy eliminates all dischargeable 
debts, and Chapter 13 bankruptcy creates a long- 
term repayment plan.
REFEREnCEs
Black, Sandra E.; and Morgan, Donald P.  “Meet the 
New Borrowers.”  Federal Reserve Bank of New York 
Current Issues in Economics and Finance, February 
1999, Vol. 5, No. 3, pp. 1-6.
Bucks, Brian K.; Kennickell, Arthur B.; and Moore, 
Kevin B.  “Recent Changes in U.S. Family Finances: 
Evidence from the 2001 and 2004 Survey of Consumer 
Finances.”  Federal Reserve Bulletin, March 2006.
King, Uriah; Parrish, Leslie; and Tanik, Ozlem.   
“Financial Quicksand: Payday Lending Sinks Bor-
rowers in Debt with $4.2 Billion in Predatory Fees 
Every Year.”  Center for Responsible Lending report, 
November 2006.
Skiba, Paige Marta; and Tobacman, Jeremy.  “Do  
Payday Loans Cause Bankruptcy?”  Unpublished 
manuscript, Oxford University, November 2007.
Telyukova, Irina A.  “Household Need for Liquidity  
and the Credit Card Debt Puzzle.”  Unpublished 
manuscript, University of California, San Diego, 
December 2007.
White, Michelle J.  “Bankruptcy Reform and  
Credit Cards.”  Journal of Economic Perspectives,  
Fall 2007, Vol. 21, No. 4, pp. 175-99.
                                                                  Percentage with credit card debt                               Median credit card debt (2004 dollars)
                                                         1989                       2004                  Difference                 1989                       2004                 Difference
                  All families 39.7 46.2 6.5 $1,300 $2,200 $900
Percentiles of income
< 20 percent 15.0 29.1 14.1 $400 $1,000 $600
20 – 39.9 percent 28.2 42.5 14.3 $900 $1,800 $900
40 – 59.9 percent 48.8 55.0 6.2 $1,200 $2,200 $1,000
60 – 79.9 percent 57.4 56.2 –1.2 $1,500 $3,000 $1,500
80 – 100 percent 49.0 48.1 –0.9 $2,600 $3,400 $800
Credit Card Debt by Income Distribution
SOURCE:  2004 Survey of Consumer Finances.  See www.federalreserve.gov/pubs/oss/oss2/2004/scf2004home.html.
ends up paying back $793 for a $325 loan.  
According to the CRL estimates, Americans 
paid $4.2 billion in payday loan fees in 2005.
Economists Paige Skiba and Jeremy 
Tobacman found that applicants for payday 
loans from a particular lender in Texas had 
an average monthly income of $1,699 and 
$235 in their checking account.8  Addition-
ally, 77 percent of the applicants were black 
or Hispanic and 62 percent were women.  
Based on the study’s results, it seems that 
access to loans can lead to recidivism.  
Within one year, a consumer whose first-
time application for a payday loan was 
approved would apply for another loan an 
average of 8.4 more times; in comparison, 
a consumer whose first-time application 
was rejected would apply 1.8 more times on 
average.  The total loans for the former were 
for $2,200 with roughly $400 in accompa-
nying fees/interest payments. 
You Get What You (Don’t) Pay For
Americans appear willing to trade 
substantial interest payments for access to 
short-term credit markets.  But, does this 
new behavior have detrimental long-term 
effects?  Based on data from the American 
Bankruptcy Institute, for every 1 million 
adults in the U.S. population, about 1,800 
filed for bankruptcy in 1980, a number that 
increased to about 7,300 in 2004.9
According to a study by economist 
Michelle White, an increase in the amount 
of revolving debt per household (especially 
in the form of credit card debt) coincided 
with the increase in personal bankruptcy 
filings from the 1980s to 2005.  There were 
5.4 times more bankruptcies in 2004 than in 
1980, and revolving debt per household was 
4.6 times larger in 2004 than in 1980.  White 
discussed other possible explanations for the 
increase in bankruptcy filings, such as job 
loss and medical bills.  However, these types 
of adverse events have not increased since 
1980.  Therefore, she concluded that the rise 
in personal bankruptcies can be attributed in 
large part to the rise in credit card debt.
Similarly, the payday loan applicants in 
Skiba and Tobacman’s study were six times 
more likely to file for bankruptcy between 
January 2001 and June 2005 than the general 
population in Texas.  The bankruptcy filing 
rate for the state was 0.38 percent per year 
versus 2.3 percent per year for loan applicants.
Skiba and Tobacman tested whether 
access to payday loans increased bankruptcy 
filings.10  They found no effect on the num-
ber of Chapter 7 filings, but the number of 
Chapter 13 filings increased significantly.11  
Within one year of his first payday loan, 
a borrower’s likelihood of filing Chapter 
13 increased by 1.9 percentage points, and 
within two years, the likelihood was 2.5 
percentage points higher.
As with any kind of loan, credit cards and 
payday loans can be convenient for some 
people as a means to borrow money for a 
relatively short period of time.  However, 
the recent rise in short-term liabilities—
especially by lower-income households—
may have long-term implications for the 
economy as demonstrated by their apparent 
correlation with bankruptcy filings. 
Kristie M. Engemann is a research analyst, and 
Michael T. Owyang is an economist, both at the 
Federal Reserve Bank of St. Louis.  For more on 
Owyang’s work, see http://research.stlouisfed.org/
econ/owyang/index.html.
The Regional Economist  |  www.stlouisfed.org   13

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