Accessible Version
More Credit, More Debt: New Evidence on Automated Credit Decisions, Accessible Data
Figure 1. Credit limits over time, by credit score
This figure shows average credit limits over time based on the age of the credit card in months. The figure shows four separate lines based on the consumers’ credit score at origination. The figure shows the prevalence of “low-and-grow” lending strategies, where the credit card company issues credit cards with low initial limits to lower credit-score borrowers, which they may then increase over time based on borrower behavior. More specifically, credit card limits at origination for accounts of subprime borrowers with credit scores below 600 are only $700, on average. However, by five years after origination, accounts of subprime borrowers have a limit of $2700, on average, a 285 percent increase. By contrast, accounts of superprime borrowers with credit scores above 760 start off with a much higher limit of $12,000 at origination, on average, and grow 25 percent to about $15,000 by five years later.
Figure 2. Limit increases among revolving and transacting accounts
This figure shows the probability of receiving a credit limit increase on the vertical axis based on quarter between 2014 and 2024 on the horizontal axis. Panel A shows the probability of receiving a credit limit increase initiated by the bank, where the blue line shows the probability conditional on being a revolving account and the red line shows the probability conditional on being a transacting account. While there is some variation over time, during recent quarters, roughly 2 percent of transactors receive a bank-initiated increase each quarter, while almost 4 percent of revolvers do. Panel B shows the probability of receiving a borrow-initiated credit limit increase. Here we see that the probability of a borrow-initiated limit increase is not meaningfully different between revolvers and transactors.
Figure 3. Revolving utilization around limit increases
Figure 3 shows revolving utilization around the time of a limit increase, comparing revolving utilization for credit cards that receive a limit increase relative to those that do not receive a limit increase during a 24-month window. Time t=1 shows the first month after the limit increase. The figure shows that revolving utilization initially declines following a limit increase, but then recovers to its previous level within about 6 months. Since the limit is now higher, the same rate of revolving utilization means that the credit card user has increased their debt following the increase in their credit limit, with the increase in revolving balances comprising about 30 percent of the credit limit increase.
Figure 4. Welfare effects of restricting credit limit increases to revolving borrowers
This figure shows the welfare effects of prohibiting credit limit increases for revolving borrowers through the lens of our structural model of household consumption, saving, and borrowing decisions. The welfare effect is measured in terms of consumption equivalent variation (CEV) relative to the baseline where credit limit increases are always permitted. The first bar shows that, overall, the counterfactual policy raises consumer welfare by roughly 1.1 percent in terms of consumption equivalent variation. The second and third bars show heterogeneity in the welfare effect across different types of consumers. Consumers without self-control issues are harmed, with welfare falling by roughly 0.1 percent, while consumers with self-control issues benefit from the policy, with welfare gains of roughly 3.1 percent in terms of consumption equivalent variation.