Examining evidence of financial and credit exclusion in Canada from 1999 to 2005

Changes are occurring in the provision of consumer credit, including the expansion of subprime and some fringe financial services (e.g., payday lending). We link two existing literatures on credit constraint and financial exclusion to assess the impact of these developments on the financial circumstances of low and modest-income consumers. We develop a model that identifies observable measures of credit constraint and financial exclusion and relate them to consumer characteristics and life cycle behaviour. We estimate this model using the two latest Surveys of Financial Security for 1999 and 2005, which provide consistent evidence of credit constraint and financial exclusion through time. We find modest overlap among our measures of financial exclusion, which include a zero balance/no account, credit card refusal, and using a pawnshop. Probit regression is used to investigate the factors influencing the incidence of financial exclusion. The results are similar for 1999 and 2005 and indicate rising incidence of financial exclusion as income and wealth fall, although the relationship is nonlinear such that incidence rises much faster at very low levels of income and wealth. Our analysis also suggests potentially important links between financial literacy, formal education, asset building, and financial exclusion and credit constraint. When we combine the samples, we find statistically significant evidence of growth in the incidence of each indicator of financial exclusion when other factors are held constant. Policy implications may include the strengthening of banking regulations that affect low-income Canadians and the promotion of universal financial literacy.     

Credit Card Practices of Vietnamese and Laotian Newcomers to Canada: A 10-year Longitudinal Perspective

This is the first study to follow a group of refugees (N = 647) for 10 years to identify how they acquired and used credit cards, a novel product to them. Acculturation to Canadian credit card use occurred; there was a dramatic increase in having cards (from 4% to 77%). The main reason initially for not having a card was knowledge barriers; later on, attitudinal, such as preferring to pay cash. Variables accounting for credit card use after 4 and 10 years were: being employed with higher income, having a checking account, being married, younger, and more fluent in English. Changing from not having to having a credit card was fostered by remaining (or becoming) married, employed, and good in English.     

Credit Card Debt and the Provision of Financial Support to Kin in the US

Credit card debt stands at over $1 trillion in the US and grows continuously. Scholars have argued that high (and growing) levels of credit card debt are attributable in part to rising economic vulnerabilities, combined with a thinning public safety net, credit cards being increasingly employed to make ends meet in this context. This paper extends this line of work by stressing that individuals and households do not rely on their credit cards only to mitigate their own financial hardships, but also those experienced by their non-coresidential kin members. More specifically, building on the notion that kin networks can constitute a source of negative social capital, we argue that individuals often accumulate credit card debt as they attempt to provide monetary assistance to their relatives in need. We also show that this effect is particularly strong in lower-income groups and in African American communities, in which need levels are especially high. Based on random and fixed effects analyses of data from the Panel Study of Income Dynamics, these insights extend scholarship on both kin networks of support and the sources of credit card debt.

     

Demographics, attitude, personality and credit card features correlate with credit card debt: A view from China

With the help of a commercial bank in China, we studied consumer credit card debt behavior² in correlation with demographics, attitude, personality, and credit card features factors. The study was conducted by using mail-in questionnaires, which were sent to credit card holders who was using or had used either revolving credit or petty installment plans. According to regression functions, we found that demographic variables and credit card features had limited explanatory power compared to attitude variables and personality variables. Specifically, we found that revolving credit use and petty installment use were closely related to attitudes about credit cards, money and debt. Risk attitude efficiently predicted petty installment use; however, it did not correlate with revolving credit use. Personality factors of self-control, self-esteem, self-efficacy, deferring gratification, internal locus of control and impulsiveness were significantly correlated with revolving credit use; on the other hand, sensation seeking, impulsiveness, and deferring gratification were correlated with petty installment use. We also found that some credit card features easily led to an “illusion of income” that facilitated consumer credit card debt behavior.     

Credit Card Ownership Among American High School Seniors: 1997–2008

The purpose of this study is to investigate the rise in credit card ownership rates among high school seniors in the United States. It uses the Jump$tart Coalition’s cross-sectional surveys from 1997 to 2008 to analyze the determinants of credit card ownership among high school seniors. These results show that students with credit cards are less financially literate than students without credit cards; and students with credit cards in their own names are almost twice as likely to work during the school year for money. These findings help make a case for improved financial education and training, and institutional changes that limit the pervasive issuance of credit cards to high school students.     

Effects of Family Life-Cycle Stages on Consumer Debts

Using the 1998 Survey of Consumer Finances (SCF), this study examined factors related to two types of consumer debt: installment debt and credit card debt. To address the limitations of the conventional life-cycle hypothesis, the study incorporated ability, willingness, and need to borrow, and prudence as well as life-cycle stages in the conceptual framework. The results of the double-hurdle model showed that life-cycle stages, willingness and ability to borrow, prudence, and the need to borrow were significant factors affecting installment debt and credit card debt. Based on the results, implications for financial counselors and educators, lenders, consumers, and policy makers are discussed.     

THE WELFARE EFFECT OF ACCESS TO CREDIT

I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit affects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption‐risk sharing more inefficient. I calibrate the model using U.S. data on credit‐card use and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare. (JEL E51, E41)     

Effects of informational nudges on consumer debt repayment behaviors

This study examines the impact of billing disclosure changes mandated by the Credit Card Accountability Responsibility and Disclosure (CARD) Act on consumers’ decisions about their monthly credit card debt repayments. The study uses data from a nationally representative monthly survey of households from June 2006 through December 2011. Estimates show that the CARD Act disclosures were effective in inducing households to increase the amounts of credit card debt paid off each month, with the strongest effects seen in the proportion of households who pay off balances in full each month. Among households who continue to carry credit card debt, there is minimal evidence of repayment behavior changes due to CARD. Results are robust to controlling for selection into credit card ownership and to a variety of time controls and subsample periods.     

Correlates of Credit Card Adoption in Urban China

Analysis of data from the 2008 Survey of Chinese Consumer Finance and Investor Education indicated that 30.0?% of the sample households held at least one credit card. Significant factors associated with the probability that an urban Chinese individual would hold a credit card included income, age, education, occupation, and awareness of credit card risks, default consequences, the credit system, and that late payments increase interest.     

Financial Knowledge and Credit Card Behavior of College Students

This study examined the relationship between financial knowledge and credit card behavior of college students. The widespread availability of credit cards has raised concerns over how college students might use those cards given the negative consequences (both immediate and long-term) associated with credit abuse and mismanagement. Using a sample of 1,354 students from a major southeastern university, results suggest that financial knowledge is a significant factor in the credit card decisions of college students. Students with higher scores on a measure of personal financial knowledge are more likely to engage in more responsible credit card use. Specific behaviors chosen have been associated with greater costs of borrowing and adverse economic consequences in the past.     

The Cost of Not Knowing the Score: Self-Estimated Credit Scores and Financial Outcomes

This study analyzes consumers’ knowledge of their own credit situation and tests whether a lack of knowledge affects financial outcomes. The unique dataset from survey and credit report data includes self-estimates of credit scores and actual scores from a low-to-moderate income sample. We argue and show empirically that many respondents don’t know their credit score and generally underestimate their creditworthiness. Furthermore, our evidence suggests that this biased self-assessment may explain differences in perceived credit constraints and credit contracts, specifically credit card interest rates. Our research suggests that an important aspect of financial literacy is self-assessment, and that it is important to encourage consumers to regularly check their credit reports and scores so as to better understand their actual creditworthiness.     

Age, debt and anxiety

What is the association between debt and anxiety? Is the relationship between age and anxiety in part due to financial debt? Recently there has been a renewed interest for the reconceptualization and measurement of socioeconomic status that moves beyond the standard education, occupation, and income. This paper uses credit card debt and stress regarding debt to examine the relationship among age, debt, and anxiety. Using data from a 1997 representative sample of more than 1,000 adults in Ohio, results show that anxiety does increase with the ratio of credit card debt to income, and with being in default; but credit card debt accounts for little of the age-anxiety association. Stress regarding overall debt does explain some of the age effect. In addition, stress also explains some of the effect of the credit card debt to income ratio, and all of the effect of default on anxiety.     

OPTIMAL MONETARY POLICY AND IMPERFECT FINANCIAL MARKETS: A CASE FOR NEGATIVE NOMINAL INTEREST RATES?

This article studies optimal monetary policy in a model with credit frictions and money demand. We show that augmenting a standard New Keynesian model with money demand and financial frictions generates a mechanism that, in equilibrium, gives rise to optimal negative nominal interest rates. In addition, we find that the tighter credit markets are, the lower the optimal nominal policy interest rate and the more likely it is to be negative. Quantitatively, when credit constraints are binding, a standard calibration of the model generates an optimal nominal policy interest rate that is roughly ?4% annually. (JEL E31, E41, E43, E44, E52, E58)     

Embeddedness and capital markets: Bank financing of businesses

The article examines the social and economic dimensions of capital markets, particularly the effects of bank and capital market structure; lending criteria and bank policies; and demand for credit, on bank financing of businesses. A critical problem in most capital markets is that lenders have inadequate information to assess the risk and creditworthiness of loan applicants. We find that many bankers continue to use assessments of character as a signal of the potential borrower's creditworthiness. Banking deregulation limits the range of signals available to lenders and therefore may have detrimental consequences for banks and local economies.     

College Students and Credit Card Use: The Role of Parents, Work Experience, Financial Knowledge, and Credit Card Attitudes

This study examined the influence of parental interactions, years of work experience, financial knowledge, credit card attitudes, and personal characteristics on college students’ credit card behaviors (i.e., number of cards and amount of debt). Based on data collected across seven universities (N = 413), we found that students who had parents who argued about finances, were juniors/seniors, and were comfortable making minimum payments were the most likely to have $500 or more in credit card debt and two or more credit cards. In addition, number of credit cards held was the only dependent variable influenced by gender and fear of credit cards. These results highlight the importance of early interventions in the life of college students including involving parents as positive role models.     

Consumers’ credit card repayment decisions: The role of higher anchors and future repayment concern

We investigated two aspects of credit card repayment decisions: the extent to which the anchoring effect of minimum repayment information may be mitigated by information on alternative anchors, specifically repayments that would repay the balance in two years (Study 1) or nine months (Study 2); and the role of future repayment concern. In two experiments, three realistic credit card statements were presented with different outstanding balances. Participants, who were randomly allocated to one of four information conditions depending on supplementary information provided on the statements, stated how much they would repay that month. They were then asked about concerns they would have about repayment difficulties if they had a fixed consumer loan over three years. In Study 1 the alternative two-year repayment anchor had a negative effect on percent repayment, whereas in Study 2 the nine-month repayment anchor had a significant positive effect, especially for those with higher future repayment concern. Also, in both studies, future repayment concern had a direct inverse effect on repayment decisions which partially mediated the effect of disposable income. It is concluded that the addition to credit card statements of a table of cost and duration information for a range of repayment amounts may usefully support repayment decisions.     

NEW EVIDENCE ON CREDIT CARD BORROWING AND REPAYMENT PATTERNS

A new dataset allows researchers to examine patterns of credit card use for both borrowing and payoff. This article addresses changes in these behaviors for different birth cohorts by estimating cohort‐adjusted age profiles for debt and payoff rates based on a time series of cross sections. Younger consumers are found to be borrowing more heavily and repaying at lower rates than older generations. The accumulation of credit card debt is found to continue over the lifecycle. This has implications for recent changes in laws governing the credit card industry. Increases in minimum required payment rates are examined and are found to increase actual payoff rates more than proportionately. (JEL D12)     

The Demand for Bank Reserves and Other Monetary Aggregates

The article starts with Haslag's (1998) model of the bank's demand for reserves and reformulates it with a cash-in-advance approach for both financial intermediary and consumer. This gives a demand for a base of cash plus reserves that is not sensitive to who gets the inflation tax transfer. It extends the model to formulate a demand for demand deposits, yielding an M 1-type demand, and then includes exchange credit, yielding an M 2-type demand. Based on the comparative statics of the model, it provides an interpretation of the evidence on monetary aggregates. This explanation relies on the nominal interest as well as technology factors of the banking sector.     

MODELING MONETARY TRENDS IN ITALY USING HISTORICAL DATA: THE DEMAND FOR BROAD MONEY 1861—1990

In this paper we estimate a stable demand for money relationship for Italy using a long series of historical data. We extend previously available data sets to obtain a sample for the years 1861 to 1990 and use cointegration analysis and two-stage estimation procedures to obtain a dynamic model for M2 demand. By employing a small number of explanatory variables and a nonlinear error-correction model we find a stable demand for money relationship. Our model incorporates significant inflation and interest rate effects, in contrast to previous studies of this type.     

BEQUEST RECEIPT AND FAMILY SIZE EFFECTS

This article tests the connection between credit constraints and negative family size effects on child earnings using bequest receipt to signal access to credit markets. The dominant economic model of fertility predicts a negative relationship between family size and child achievement. In the model, limits on borrowing create this "quality-quantity trade-off." This article tests for the relevance of credit constraints using Panel Study of Income Dynamics data to compare family size effects across groups defined by bequest receipt. Contrary to the credit constraints explanation, those receiving large bequests exhibit large family size effects, while those not receiving bequests show little to no effect . ( JEL J13, D1, I2)