Credit limits, utilization rates, and interest rates


To some extent, higher card balances of college-educated and higher-income
credit revolvers reflects higher credit limits available to such households. Starting
with the 1995 survey, data were collected on the total bank-type card limit—that is,
the maximum amount that could be charged on the all bank-type credit cards owned
by the household—as well as on the interest rate charged on the card with the highest
balance (or the most frequently used card, if the balance on all cards was zero).
Table 6 indicates that credit limits are generally highest for households that
have demonstrated that they can handle credit card accounts responsibly, and not
necessarily those that have the greatest need to borrow. Credit limits tend to be
highest for those that carry no balance but actively use their cards, or that carry a
balance although they at least sometimes pay the balance in full. The median credit
limit for these households ranges from $10,000 to $15,000, depending on the survey
year. Households that either do not use their cards actively or usually revolve credit
typically have credit limits of under $10,000 and often closer to $7,500. Credit limits
are typically larger for households aged between 35 and 64 than for households under
35, and are somewhat larger than for households over 65. Credit limits also tend to be
higher for households with higher levels of education and higher income. Table 6 also
indicates that between 1995 and 2001, the median card limit declined for younger
households, for those with less than high school education, and for those with incomes
below $10,000. Multiple factors are likely to have contributed to the decline in the
median card limit, but in part it may reflect the increase in card ownership by these
demographic groups. The typical lower-education or lower income household who
nonetheless qualified for a bank-type credit card in 1995 may have had a somewhat
higher credit rating than the typical such household in 2001.
Columns 8 and 12 show the median credit card utilization rates of households
that revolve credit, constructed as the balance remaining on the card after the last
payment plus any new charges made on the card over the current month, divided by
the available credit limit.12 Households who have a balance but at least sometimes pay
it off had a median card utilization rate of 15 percent in 1995; the utilization rate was
just under 20 percent in 1998 and then declined a bit to 17.5 percent in 2001.
Households that hardly ever pay off balances have considerably higher median
utilization rates of almost 40 percent in 1995 and about 50 percent in 1998 and 2001.
These higher utilization rates reflect both the higher card balances of this group as
well as the somewhat lower card limits these households face. Nearly one-tenth of
card holders and just under 20 percent of those who revolved credit in 2001 had a
credit card utilization rate of 75 percent or more. A similar percentage of card users
had high utilization rates in 1998, but only about half as many did in 1995. In all
survey waves, these households were more likely to be young and to have less than
college level education. Most high-utilization households “hardly ever” pay off their
card balance. More than half of high-utilization households (and over 70 percent of
young households) can be classified as “liquidity constrained,” compared with less
than 20 percent of households with lower utilization rates and 6 percent of card users
without an outstanding balance. Although the cross-section nature of the SCF
prevents us from investigating the relation between current high card utilization rates
and future default or bankruptcy filings—a topic we consider in more detail in Section
10—high-utilization households do appear more likely to exhibit indicators of
financial difficulty: 18 percent of high-utilization households in 2001 indicated that in
the previous year they had been two months or more behind in any type of loan
payment, compared with only about 5 percent for all households.13


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