Sustained Credit Card Borrowing
AbstractUsing a large panel of credit card accounts, we examine the dynamics of credit card
borrowing and repayment in the United States and what these imply for the expected
costs of credit card debt to consumers. Our analysis reveals that: (1) credit cards
are predominantly used to borrow, (2) card debt is sustained for long periods and
balances frequently rise before being repaid, (3) this debt is potentially more costly
than anticipated. We document that 82% of outstanding balances are debt
and that 70% of this debt accrues to those borrowing continuously for a year or more.
The expected annualized cost of an episode of continuous borrowing is 28% of its initial
balance, or 13 p.p. higher than the average APR. Moreover, credit scores decline during
episodes, further raising the expected cost of borrowing on a card.