Effects of Low Income Families' Ability and Willingness to Use consumer Credit on Subsequent Outstanding Credit Balances

The indebtedness of American households grew substantially in the last decade. The outstanding balance of all consumer credit, excluding mortgage debt, was $800 billion at the end of 1990. The growth of consumer credit exceeded the growth of after-tax family income in the 1980s (Canner and Luckett 1991). More than 80 percent of families had consumer installment debt, a type of consumer credit, as reported in the 1986 Survey of Consumer Finances (Avery, Elliehausen, and Kennickell 1987). In 1988, each household owed an average of $7,104 for automobile installment loans, $3,029 for revolving credit, $2,192 in other consumer debts, and $1,661 in credit card balances (U.S. Bureau of Census 1990, 133). During the decade from 1980 to 1990, a considerable portion of household income, an average of 17 percent, was spent to repay consumer credit (Calem 1992; Canner and Luckett 1991). Along with the growth of consumer credit, there was an increase in the use of consumer credit among families whose incomes were lower than the majority of families in the mid-1980s. REVIEW OF LITERATURE This research focuses on consumer credit use in low income families. Access to credit by low income families may be limited. Their applications for credit are more likely to be turned down than other income classes because of credit qualification policies. Families with a net weekly income of $360 and less had fewer chances of obtaining a credit commitment and thus having access to credit than the average income family (Berthoud and Kempson 1990). Low income people may not even apply for credit for fear of being rejected. Legally and reasonably priced credit was not generally available to low income families before 1980 (Bowers 1979). However, a dramatic change occurred in bank card holdings among low income consumers in the 1980s (Canner 1988). During the period from 1983 to 1986, the portion of families with incomes below $10,000 (1985 constant dollars) holding a credit card increased 91 percent. This increase is much greater than for any other income group. Low income groups still use less credit than higher income groups and have fewer credit commitments, according to the Household Credit Data Book (Krannert Graduate School of Management 1989). The credit practices of low income families are quite different from those of families at other income levels. According to Howells (1990) below average income groups tend to use credit to help cope with budgeting troubles instead of increasing purchasing power. Families earning less than $10,000 per year are much more likely to maintain high outstanding credit card balances and to treat those balances as a type of installment debt. Fewer of them are concerned about the service features of credit, that is, convenience, safety, or identification (Bowers 1979; Bowers and Crosby 1980). Low income households are least likely to be able to borrow at a low interest rate or to possess assets to pay debts and they are more likely to pay the minimum payment on their credit cards, which results in a substantial burden of interest payments (Boston Company Economic Advisor Inc. 1992). Research on credit use by low income families has not been sufficient to explain their consumer credit behavior. Many researchers have investigated the determinants of consumer credit use since the mid-1960s. The most commonly examined determinants of consumer credit use have been economic or sociodemographic variables, including annual family income, family assets, education, life cycle, gender, marital status, years at residence, size of household, ownership of an automobile, and housing status (Awh and Waters 1974; Canner and Cyrnak 1985, 1986; Canner and Luckett 1990, 1992; Courtless 1993; Danes and Hira 1990; Johnson and Sullivan 1981; Lindley, Rudolph, and Selby 1989; Tabor and Bowers 1977; Yeo 1991). A few researchers have studied consumers' attitudes toward credit use as an indicator of their willingness to borrow, accompanied by discussions of various reasons for credit use. …