Household bankruptcy filings have been increasing in the US for the past quarter of a century. In 1984, 0.33% of American households filed for bankruptcy. The number of filers rose to 0.93% of households in 1991 and continued to increase up to 1.41% in 2004. This trend can also be spotted in the number of Canadian bankruptcy filers (Livshits et al. (2005)), suggesting that the increase should not be solely attributed to legal changes in the US.
During this period, households’ access to unsecured credit (mainly through credit cards) flourished. While in 1989, 56% of households had access to credit cards and 29% of households carried a positive balance on their accounts. Fifteen years later credit card access rose to 72% and 40% of American households were carrying debt on their accounts (the latter are called revolvers in the literature). Moreover, the average credit card debt of revolvers increased from $1, 830 in 1989 to $3, 300 in 2004. But households were not just borrowing more subject to the same credit limits. During this period the average credit card limit available for an American household more than doubled; they rose from $7, 100 in 1989 to $15, 200 in 2004.
The importance of credit card debt on a household’s decision to file for bankruptcy has been well documented (see for example Domowitz and Sartain as well as Sullivan, Warren and Westbrook.) Therefore, under standing the dynamics behind the expansion of credit card availability and its usage is critical for studying the rise of household bankruptcies.
Barron and Staten document that expansion of the credit card industry would not be possible without rapid improvements in information technology and credit rating technologies. In 1997 credit bureaus issued some 600 million reports about credit seekers, (Padilla and Pagano), and in the following decade credit scores produced by the Fair Isaac and Company, known as FICO scores, became the industry’s standard tool for assessing borrowers’ credit worthiness. Moreover, Edelberg shows that lenders increasingly used risk-based pricing of interest rates in consumer loan markets during the mid-1990s, and Berger reports that improvement in the lending capacity was due to improvements in information technology used by the banks.
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