How Credit Access Has Changed Over Time for U.S. Households

The financial industry made a number of efforts throughout the 1990s to provide additional borrowing opportunities to households traditionally constrained by the credit markets. Using data from the Survey of Consumer Finances (SCF), this study investigates the degree to which household liquidity constraints relaxed between 1983 and 1998. The gap between actual and desired borrowing is estimated. The findings indicate that the ability of all households to obtain their desired debt levels increased after 1983 and most dramatically between 1992 and 1998. The findings hold true across all households regardless of permanent earnings, age, gender, or race. Those experiencing the greatest gains in credit access were black households and households with low permanent earnings. ********** Throughout the 1990s, the financial industry made a number of efforts to provide additional and more affordable borrowing opportunities to households traditionally constrained by the credit markets--namely, low-income and minority families. Households were offered lower interest rates, fees, and downpayments, more flexible underwriting standards, and new financial instruments and expanded product offerings in both the housing and consumer credit markets (Bassett and Zakrajsek 2000; Black and Morgan 1999; Canner, Durkin, and Luckett 1998; Canner, Passmore, and Laderman 1999; Lindsey 1995, 1996, 1997; Stavins 2000, 2001; Yellen 1996; Zandi 1997). The financial industry also engaged in more aggressive marketing strategies. Financial deregulation in the 1980s resulted in increased profitability. Competition for these profits led to an insurge of new lenders who were willing to take on more marginal borrowers. At the same time, other financial developments, such as those brought about by technological advances, lowered the costs of producing credit and encouraged lenders to take on more marginal borrowers and offer more credit. In the end, it is clear that the financial industry made a number of efforts to provide additional and more affordable borrowing opportunities, especially to households traditionally constrained by the credit markets. However, it is not clear 1) whether access to credit actually increased during these years and 2) who actually received these increases in access to credit. Using cross-sectional data from the 1983, 1989, 1992, 1995, and 1998 Survey(s) of Consumer Finances (SCF), this study investigates the degree to which household liquidity constraints relaxed between 1983 and 1998. Using a direct measure of liquidity constructed from the SCF, the gap between actual and desired borrowing is estimated to examine how credit access changed over time and across households. ' The gap between actual and desired borrowing is calculated according to the total amount of debt held by the household, where total debt is defined to be the sum of mortgage debt, other real estate debt, credit-card debt, installment, lines of credit, and other debt not reported elsewhere. The hypothesis of this study is that the ability of all households to obtain their desired debt levels increased between 1983 and 1998. Moreover, those experiencing the greatest gains in credit access were black households, female-headed households, and households with low permanent earnings. LITERATURE REVIEW A number of studies have tested the life-cycle, permanent income hypothesis (LC-PIH) against the alternative that households are liquidity constrained. These studies rely on indirect evidence to provide estimates of the degree to which U.S. households are liquidity constrained as well as empirical analysis of whether these liquidity constraints affect consumption behavior (Hall and Mishkin 1982; Hayashi 1985; Mariger 1987; and Zeldes 1989). The findings from these studies indicate that approximately 19% of U.S. households are liquidity constrained and between 16 and 20% of U.S. consumption behavior is constrained. …