Younger People Borrow More Heavily, Repay More Slowly: Report

Published January 22, 2013

Younger Americans not only take on relatively more credit card debt than their elders, they are also paying it off at a slower rate, according to a first-of-its-kind study.

The findings suggest younger generations may continue to add credit card debt into their 70s and die still owing money on their cards.

“If what we found continues to hold true, we may have more elderly people with substantial financial problems in the future,” said Lucia Dunn, coauthor of the study and a professor of economics at Ohio State University.

“Our projections are that the typical credit card holder among younger Americans who keeps a balance will die still in debt to credit card companies.”

The results suggest a person born between 1980 and 1984 has credit card debt substantially higher than that held by the previous two generations: on average $5,689 higher than his or her “parents” (people born 1950-1954) at the same stage of life and $8,156 higher than his or her “grandparents” (people born 1920 to 1924).

But the study also uncovered some good news: Increasing the minimum monthly payment spurs borrowers to not only meet the minimum but to pay off substantially more, possibly eliminating their debt years earlier.

Dunn conducted the research with Sarah Jiang. Their results appear in the January 2013 issue of the journal Economic Inquiry.

New Data

This study is significant because it is the first to use data on not only how much people borrow on their credit card but also their complete payoff information.

“Most datasets available to researchers only contain one side of credit card behavior—borrowing. We have data on how they pay off credit cards as well, which gives us a more complete picture of their debt situation,” Dunn said.

The data come from two large monthly surveys. The first is the Ohio Economic Survey, which was conducted from 1996 to 2002. This was the precursor to the national-level Consumer Finance Monthly, which began in 2005 and is ongoing. It is conducted by Ohio State’s Center for Human Resource Research.

The researchers combined the data to obtain information for 13 years, from 1997 to 2009. They examined respondents from 18 to 85 years of age, with a final sample size of 32,542.

Life-Cycle Hypothesis

When the researchers analyzed data from the entire set of respondents at any one point in time, they found evidence of what is called the simple life-cycle hypothesis: Credit card debt increases at younger ages, peaks at middle ages and then tapers off at older ages.

But this is misleading because it doesn’t take into account differences in how people who grew up at different times in history may approach credit card debt, Dunn said.

To correct for that, the researchers compared the credit card debt of 15 different birth cohorts—people born in the same five-year period. The first cohort was 1915-1919. and the last cohort studied was people born between 1985 and 1989.

Using a statistical model, the researchers were able to compare how people who were born in different time periods, but with similar characteristics—such as education, income, and marital status, among many other factors—dealt with credit card debt.

They found young people born 1980 to 1984 had on average over $5,000 more in credit card debt than their parents at a similar point in their life and slightly more than $8,000 more when compared to their grandparents.

The results also indicate younger people are paying off their debt more slowly, too. The study estimates the young people’s payoff rate is 24 percentage points lower than their parents’ and about 77 percentage points lower than their grandparents’ rate.

‘Less Stigma’

Dunn said there are several reasons why younger generations have higher credit card debt.

“Credit is more readily available now, and there have been changes in interest rates and less stigma attached to having credit card debt, which may all make younger people today more willing to go into debt,” she said.

“Our projections are that the typical credit card holder among younger Americans who keeps a balance will die still in debt to credit card companies,” she concluded

With the payoff data available, the researchers were also able to find out how increasing the minimum payment on credit cards affected how much cardholders actually paid on their debt each month.

Good News

The good news in this study is that cardholders respond to higher minimum payments by paying well above what they have to. Findings showed increasing the minimum payment by one percentage point increased the average payoff rate by 1.9 percentage points. That means increasing the minimum required payoff rate from 2 percent to 4 percent increases the average payoff rate by 3.8 percentage points.

The real-world effects could be huge. For example, making only the 2 percent minimum required payment each month on a balance of $1,000 at an interest rate of 19 percent means it takes eight years and four months to repay the balance in full.

However, holding other factors constant, if the actual monthly payment increases from 2 percent to 5.8 percent as a result of a new policy, it will take only one year and nine months to pay off the debt.

Jeff Grabmeier ([email protected]) is senior director of research, innovations, and communications at Ohio State University.