The program in Consumer Credit & Payments is a Bank-wide effort to advance our understanding of these markets and to make this information available to industry, consumers, policymakers, researchers, and the public at large. On these pages you will find research and analysis produced by the Bank's subject matter experts in Community Development Studies and Education, the Payment Cards Center, Research, Supervision and Regulation, and other areas.
This paper presents a brief exposition of the history of the secured credit card and documents a series of stylized facts about the secured card market. The author uses a December 2015 cross section of the secured card market to characterize current market offerings and contrasts them with standard (unsecured) cards. He also investigates the effects of opening, and keeping open, a secured card on consumers' creditworthiness over the next two years.
In this paper, the authors examine how a negative shock to the security of personal finances due to severe identity theft changes consumer credit behavior. They show that many identity theft victims experience persistent, positive changes in credit characteristics. The authors argue that these changes are consistent with increased salience of credit file information to the consumer at the time of severe identity theft.
Supersedes Working Paper 14-28.
MPOWER Financing has taken an innovative approach to student loan underwriting. Using empirical data, MPOWER designed a scoring model that helps predict future loan repayment for high-potential students who have yet to establish a credit history. MPOWER presented its approach at a Payment Cards Center workshop. This paper recaps that event.
There is little agreement in the recent literature on the causes of consumer defaults. Various papers emphasize how balance sheet or income statements may affect this consumer decision. In this paper, the authors use a plausibly exogenous income shock and rich data on balance sheets and income statements of bankruptcy filers in Canada to empirically test if both of these channels can interact to cause household bankruptcy.
Supersedes Working Paper 14-17.
Discussion Paper Released: The Secured Credit Card Market
In this paper, the author presents a brief exposition of the history of the secured credit card, beginning with its origins in California in the 1970s. He presents a series of stylized facts based on a December 2015 cross section of the secured card market. He finds that most secured cards require an annual fee, tend not to have promotional offers or rewards, and often have higher purchase annual percentage rates than their unsecured counterparts. The author also finds that the percentage of secured card accounts in a delinquency status is more than double that of unsecured cards and that far fewer secured cards are inactive compared with unsecured cards. In addition, the annual income of secured card consumers is about 43 percent lower than unsecured card consumers. Last, he examines how the credit scores of consumers opening a secured card account change during the first two years of account history. The author finds that keeping a secured card account open is correlated with improved creditworthiness, while closing an account, either in good standing or in default, is correlated with significantly reduced creditworthiness.
Working Paper Released: Identity Theft as a Teachable Moment
This paper examines how a negative shock to the security of personal finances due to severe identity theft changes consumer credit behavior. Using a unique data set of linked consumer credit data and alerts indicating identity theft, the authors show that the immediate effects of fraud on consumers are typically negative, small, and transitory. After those immediate effects fade, identity theft victims experience persistent, positive changes in credit characteristics, including improved risk scores (indicating lower default risk). The authors argue that these changes are consistent with increased salience of credit file information to the consumer at the time of severe identity theft.
Supersedes Working Paper 14-28.
The authors provide new causal evidence that keeping up with the Joneses behavior causes financial distress by examining whether lottery prizes of random dollar magnitudes increase bankruptcy filings of very close neighbors of the winner. They find that a 1% increase in the lottery prize causes a 0.04% rise in subsequent bankruptcies among the winners’ close neighbors. The authors also provide evidence on conspicuous consumption as a mechanism for this causal relationship. The size of lottery prizes increases the value of visible assets (e.g., houses, cars) but not invisible assets (e.g., cash, financial assets), appearing on the bankruptcy balance sheets of neighboring bankruptcy filers.
Supersedes Working Paper 16-04.
Discussion Paper Released: Future Potential versus Past Performance: MPOWER Financing's Innovation in Student Loan Underwriting
The Payment Cards Center hosted a February 2016 workshop featuring MPOWER Financing, a start-up public benefit corporation created to be a source of student loans for high-potential scholars who either do not qualify for federal aid or who face a gap between federal aid maximums and the full cost of their educations. MPOWER has taken a unique approach to loan underwriting that is based on future potential rather than past credit experience and has developed a scoring model that helps predict loan repayment for young adults who have yet to establish a credit history. This paper summarizes highlights from the MPOWER workshop.
Working Paper Released: The Causes of Household Bankruptcy: The Interaction of Income Shocks and Balance Sheets
We examine how household balance sheets and income statements interact to affect bankruptcy decisions following an exogenous income shock. For identification, we exploit government payments in one but not any other Canadian province that varied exogenously based on family size. Receiving a larger income shock from the payment (relative to household income) reduces the count of bankruptcies, with fewer remaining filers having higher net balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone). Receiving an income shock thus causes households that would receive lower net balance sheet benefits under bankruptcy law to select out of bankruptcy.
Supersedes Working Paper 14-17.