An overview of consumer data and credit reporting

Federal Reserve Bulletin, Feb, 2003 by Robert B. Avery, Paul S. Calem, Glenn B. Canner

Outstanding balances. Most consumer indebtedness on active accounts involves mortgages. Mortgages represented about 67 percent of the dollars outstanding but only 5 percent of the active credit accounts (table 3). Nearly 30 percent of all active mortgages in the data had outstanding balances of $100,000 or more. Installment accounts, accounting for about 22 percent of the balances, involved the second largest proportion of all consumer debt. Installment accounts also tended to be relatively large; 46 percent had balances of $5,000 or more. In contrast, revolving accounts represented a relatively small share of outstanding balances (11 percent), even though they were by far the largest proportion of active accounts measured by number. This difference arises because more than half of all revolving accounts had zero balances and many accounts had relatively small credit limits, effectively restricting the amounts a consumer could borrow. Among the types of revolving accounts, those issued by retailers are the most likely to show a zero balance.

The large share of revolving accounts that showed a zero balance at last report is not surprising. The use of credit cards varies greatly because some cards are unused for a period of time whereas others are used regularly either as a convenient means of payment or a source of credit. Whether a card is reported as having a balance is not an indicator of whether the card is being used to borrow for an extended period or is being used simply as a convenient payment device. Even when a consumer pays the full balance billed each month on a card used regularly, the credit report is likely to show a balance due. Such a balance appears because payments are not received and credited immediately and additional charges are likely to be made between the date the last bill was generated and the date that balance information is sent to the credit reporting company.

Credit limits. To calculate a utilization rate for a revolving account, one must have information on both an account's outstanding balance and its credit limit. The credit limit, however, is not regularly reported for all accounts. Approximately one-third of all active revolving accounts in the sample lacked such information (table 4A). (18) For these accounts, other techniques are required to estimate a utilization rate. The most common approach in these circumstances is to use the highest balance ever reported on the account (either the current balance or the historic high balance) as a surrogate for the credit limit. As described below, this alternative approach creates very different profiles regarding the extent to which revolving accounts have been drawn on. For mortgages and installment loans, the credit limit and the high balance (the original amount borrowed) are the same, and so the profiles will be identical.

Credit limits on revolving accounts are not typically very large. About 25 percent of the sample accounts meeting the authors' definition of active had limits under $1,000, and about 41 percent had credit limits in the $1,000 to $4,999 range (table 4A). Only a very small proportion of revolving accounts had limits of $25,000 or more. (19) By contrast, mortgages and, to a lesser degree, installment loans had much higher credit limits (original balances). More than 90 percent of the mortgage accounts had original balances over $25,000, and 41 percent of installment loans had original balances of $10,000 or more.