Household debt over the life cycle

Abstract

Abstract Using data from the 2001 Survey of Consumer Finances, this study examines how the holding of types and amounts of household debt changes over the life cycle. The results show that the likelihood of holding each type of debt and the amount of each type of debt compared to total assets decrease with age. Although the popular press has speculated that older households accumulate excessive amounts of mortgage debt and credit card balances, our results do not support this claim. However, there is evidence that it may be more difficult for poorer older households to pay off their credit card balances. © 2005 Academy of Financial Services. All rights reserved. JEL classification: D12; D14; D91 Keywords: Household debt; Life cycle; Financial assets; Non-financial assets; Credit card balances I. Introduction Alarming stories of older Americans who are going deeper into debt have been featured in the popular press (Breckenridge & McGregor, 2003; Marmon, 2003). Unlike the elders of previous generations, today's seniors have been characterized as carrying high credit card balances and accumulating mortgage debt. Moreover, the data on U.S. family finances support this claim. According to the Survey of Consumer Finances (SCF), the proportion of older households holding installment debt and credit card balances increased from 4.2 and 11.2% to 9.5 and 18.4%, respectively, between 1998 and 2001 (Aizcorbe, Kennickell & Moore, 2003). Also, the increased problem with late debt payments for older households suggests that the debt holders among this group face credit-related financial problems. The percentage of older households with any debt payment 60 days or more past due has increased since 1995, while the percentage did not vary much for other age groups (Aizcorbe et al., 2003). Despite these observations, there has been little study of the relationship between the age of the household head and the amount and types of debt that the household holds. Using detailed information on the level of household debt available in the 2001 SCF, this paper will investigate how both the likelihood of holding debt and the amount of debt compared to total household assets change over the life cycle for different types of household debt. For most households, their total debt consists of mortgage debt, outstanding credit card balance, and installment loans. Controlling for other household characteristics that change over the life cycle such as household assets, income, and size, this study will investigate whether the age of the household head has a significant impact on the likelihood of holding mortgage, credit card, installment, and other debt and the amount of these types of debt compared to total assets. This study differs from previous literature in three significant ways. First, we focus on the determinants of different types of debt over the life cycle. Other studies have examined some types of debt (Bertaut & Haliassos, 2004; Castronova & Hagstrom, 2004; Kim & DeVaney, 2001) or credit constraint (Cox & Jappelli, 1993; Crook, 2001), but no one has conducted a comprehensive analysis of total debt and the major components of total debt over the life cycle. Because the total debt of a household consists of both secured (mortgage and some types of installment debt) and unsecured debt (credit card balances), it is important to understand the differences in determinants of holding each type of debt. In particular, certain characteristics of households, such as age, race, or marital status, might affect the amount of unsecured debt, while these characteristics might not have the same effect on the amount of secured debt. Second, we examine the effect of financial and non-financial assets on debt over the life cycle. Although previous research has linked assets to debt, there might be differences in terms of the role of financial and non-financial assets on debt holdings. …