March 5, 1999


The latest issue of the New York Fed’s Current Issues in Economics and Finance --Meet the New Borrowers-- is enclosed for your review.

Credit card write-offs have risen sharply in recent years, suggesting that lenders are reaching out to riskier borrowers, according to authors Sandra Black and Donald Morgan, economists in the Banking Studies area of the Bank.

Black and Morgan document that the share of U.S. households with a credit card rose nearly 11 percentage points (roughly 20 percent) between 1989 and 1995. Not coincidentally, perhaps, banks also began to write off more credit card loans in 1995. By 1997, banks were charging off bad credit card loans at the highest rate in twenty-five years.

While the rise in credit card write-offs may have started in 1995 with the mild slowdown in U.S. job growth, the fact that these bad loans continued to mount even after job growth rebounded implies that lenders have been offering cards to individuals who have a greater likelihood of delinquency, the authors state.

Black and Morgan investigate how the personal, demographic, and economic profile of the typical cardholder has changed in recent years and identify the changes in the profile that seem most important in explaining heightened risk in the credit card market.

The authors find that:

  • Compared with their 1989 counterparts, cardholders in 1995 owe more, relative to income. The strong link observed between debt burdens and delinquency rates suggests that higher debt burdens are the most important factor behind the rise in charge-offs.
  • Another important factor is the changing occupational mix of cardholders: the 1995 borrowers are more likely to work in relatively unskilled blue-collar occupations. Delinquency rates are higher for these workers, perhaps because their income is more closely tied to the business cycle.
  • Characteristics such as marital status, job tenure, and a willingness to borrow for riskier purposes were less important in explaining the rise in charge-offs.

Contact: Douglas Tillett

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