Monitoring the Household Sector with Aggregate Credit Bureau Data

Business Economics, Jan, 2000 by John M. Barron, Gregory Elliehausen, Michael E. Staten

Contrary to expectations, both a greater amount of total consumer debt per borrower and an increase in that amount from the prior year are associated with lower, not higher, delinquency rates in the closed-end installment delinquency regression. However, an increase in total consumer debt increases revolving delinquencies. This result may reflect a supply effect as well as reveal something about consumers' preferred method of adjusting their debt holdings. First, lower-risk consumers are able to use more consumer debt of all types, hence the coincidence of higher debt levels and lower delinquencies in the installment delinquency equation. However, in the revolving delinquency equation, notice that the variables capturing a change in total debt per borrower and a change in revolving debt per borrower are both positively associated with revolving delinquencies, but only the total debt variable is significant. It may be simply that changes in total debt holdings are more likely to be in revolving accounts rathe r than installment accounts, and in this particular equation the two variables are capturing the same effect. Of course, we have already noted that a larger number of accounts, holding the amount of debt per borrower constant, clearly signals risk for all three types of credit.

Local economic and demographic variables also help explain county-level delinquency rates. Of the local variables that reflect vulnerability to financial distress, all but the proportion of adults who are divorced or separated are significant in each delinquency regression. All significant variables have the predicted sign. Higher income, increases in income, lower unemployment, decreases in unemployment, and greater health insurance coverage are associated with lower delinquency rates. The proportion of adults over age fifty is significant and negative in all three regression, and population density, a proxy for local-level social stigma, is significant and positive. Reflecting effects of the legal environment, the dummy variable for unlimited home exemption is significant in the closed-end installment credit regression, and the dummy variable for exemption of wages for garnishment is significant in the revolving credit regression. The latter result is noteworthy for its consistency with theoretical models of creditor remedies (for example, Jaffee and Russell 1976; Barro 1976), which predict that lowering the cost of default reduces borrowers incentives to repay, thereby increasing the probability of default. Because much of revolving credit is unsecured, the boost to revolving delinquencies associated with the exemption from garnishment is not surprising.

Finally, the time dummies for years 1996, 1997, and 1998 indicate significant increases in delinquency rates after controlling for other factors. These results are similar to results in the bankruptcy regression and are consistent with declines in the second type of stigma--that is, an increase in the willingness to default on payments for any level of debt relative to income.