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December 2013, EB13-12

Economic Brief

How Risky Are Young Borrowers?
By Peter Debbaut, Andra C. Ghent, Marianna Kudlyak, and Jessie Romero

Young borrowers are conventionally considered the most prone to making
financial mistakes. This has spurred efforts to limit their access to credit,
particularly via credit cards. Recent research suggests, however, that young
borrowers are actually among the least likely to experience a serious credit
card default. One reason why people obtain credit cards early in life may
be to build a strong credit history.
Access to credit is an important way for individuals to smooth their consumption throughout
their lives. This may be especially true for young
people because they are more likely to be making large investments in their human capital and
because they have not yet built up significant
wealth. Credit cards may be a valuable source
of credit and consumption smoothing to young
people given their relatively limited exposure to
other means of credit.
In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act
(CARD Act), which regulates when lenders can
change the interest rate on a card, the fees they
can charge, and the language of credit card disclosure forms. In addition, Title 3 of the Act limits
the marketing of credit cards to people under
the age of 21 and makes it illegal to issue a credit
card to anyone under 21 unless the individual has
a cosigner or can demonstrate “an independent
means of repaying any obligation arising from
the proposed extension of credit.” The impetus for
this provision of the CARD Act was a concern that
young people are more likely to accumulate excessive debt and to default on that debt, perhaps

EB13-12 - Federal Reserve Bank of Richmond

because they are not financially literate or because they are more prone to impulse purchases.1
Legislation designed to protect consumers from
the consequences of financial decisions may be
well-intentioned, but it presumes consumers are
likely to make financial mistakes. From an economist’s perspective, however, it’s very difficult for
an outside observer to determine whether a
consumer has made a mistake. Choices depend
on the preferences and constraints of the person making the decision, not on the beliefs of
the observer. For a consumer who plans to sell a
home in a few years, for example, an adjustablerate mortgage that begins at a lower interest rate
might be a better option than a fixed-rate mortgage. Likewise, obtaining a credit card might be
a prudent choice for a young person who does
not have access to other types of credit.
There is little empirical research on young people
and credit card default. The CARD Act, however,
offers researchers a quasi-natural experiment for
examining the impact of credit card availability
on young people. In a recent working paper, three
of the authors of this brief (Debbaut, Ghent, and

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Kudlyak) use the Act to study whether or not young
people are worse credit risks than older borrowers.2
The authors also examine the effects of early entry
into the credit market on the likelihood of default.
These effects are not straightforward.
On the one hand, a person who gets a credit card
early in life has more time to accumulate debt and
might therefore be more likely to be delinquent on
that debt. On the other hand, someone who gets a
credit card at a young age has more time to learn
how to manage debt, perhaps lowering the risk of
future delinquency or default.
The CARD Act and Credit Availability
The CARD Act was signed into law in May 2009, but
credit card companies were not required to comply
with all the provisions of the Act until February 2010.
Borrowers and lenders thus were aware of pending
changes for at least half a year before they went into
effect. This knowledge could have influenced borrowers and lenders in several different ways. For example,
consumers under age 21 might have obtained a
credit card earlier than they otherwise would have, or
they might have obtained an additional card. Credit
card issuers might have tried to increase the supply
of credit to young people in an effort to offset the
effects of the Act. Conversely, issuers might have
started changing their systems and procedures prior
to February 2010 to make sure they would be ready
to comply with the new law, thus reducing the supply
of credit to young people.
Debbaut, Ghent, and Kudlyak compare the credit card
status of individuals who were 18 or 19 years old in
2009, and thus would have been 19 or 20 years old
when the law came into effect, with individuals who
were 20 or 21 in 2009, and thus would have been 21
or 22 in 2010 and unaffected by Title 3. The authors
find that anticipation of the CARD Act appears to have
decreased, not increased, the availability of credit
to young people. People who were 18 or 19 in 2009
were several percentage points less likely than those
who were 20 or 21 to have a credit card, and if they
did have a credit card, they were more likely to have
a cosigner for that card.

Based on this evidence that the CARD Act affected
credit availability before it was officially in place, the
authors include 2009 in their analysis of the total
effect of the Act. In this analysis, they compare credit
available to young people via credit cards in 2008 to
the credit available in 2010. They find that the Act
did have a significant effect on credit card availability. People who were 20 years old in the fourth
quarter of 2010 were 8 percentage points less likely
to have a credit card than people who were 20 in the
fourth quarter of 2008, and if they did have a card,
they were 3 percentage points more likely to have a
cosigned card.
Default and Age
Debbaut, Ghent, and Kudlyak look at the relationship
between borrower age and credit card default. They
find that in general, the risk of credit card default is
highest for middle-aged borrowers and lower for
young and elderly borrowers. Borrowers between
the ages of 35 and 44 are 10 percentage points more
likely to have a serious delinquency than a borrower
between the ages of 18 and 20 and 13 percentage
points more likely than borrowers over the age of 65.
The reason might be that young borrowers have not
yet had time to accumulate significant debt or that
young borrowers have fewer spending commitments
and can more easily curtail their consumption. But
youth in and of itself is not necessarily a risk factor
for serious delinquency.
Young borrowers are, however, slightly more likely
to experience minor delinquencies, perhaps because they have less financial experience than older
borrowers.3 As they get more practice using credit
cards, they likely will discover ways to avoid minor
delinquencies, such as automating payments or
consolidating cards. Financial experience, however,
does not seem to reduce serious delinquency, since
the likelihood of serious delinquency is highest for
middle-aged borrowers.
Who Gets Credit Cards Early?
Young people might not be at greater risk of serious
default while they are young, but does early entry
into the credit card market make them more prone

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to financial problems later in life? Analyzing whether
or not young borrowers are bad borrowers is complicated by the fact that people who choose to get
credit cards early might be better or worse credit
risks than average debtors because of factors that
are not necessarily related to age.
Because the CARD Act had a material effect on
young people’s usage of credit cards, it is possible to
use the Act to identify differences between people
who choose to get a credit card before they turn 21
and people who choose to wait.
Debbaut, Ghent, and Kudlyak compare 22-year-olds
in the fourth quarter of 2009 to 22-year-olds in the
fourth quarter of 2012. In both groups, the individuals waited until age 21 to get their first credit card.
Those in the former group waited until 21 to get a
credit card by choice because they would have been
unaffected by the CARD Act. But it is reasonable to
assume that at least some of the people in the latter
group, who were 21 in 2012, did not get a credit card
until age 21 because they were prohibited from doing so by the CARD Act. Comparing the delinquency
rates of these two groups can shed light on how
people who self-select into early credit card usage
(or who would self-select if they were able to) differ
from those who wait.
The authors find that people who likely would have
gotten a credit card prior to age 21 were less likely
to experience a serious credit card delinquency than
those who chose to wait until age 21. These results
suggest that individuals who self-select into early
credit card usage might be better credit risks than
those who choose to wait.
Early Entry, Mortgages, and Defaults
Another reason to limit young people’s credit card
usage is to protect them from potentially damaging
their credit and harming their ability to get credit in
the future, for example to buy a home or to take out
a small business loan. Debbaut, Ghent, and Kudlyak
explore whether or not there is a link between early
access to credit cards and the likelihood of having a
mortgage at age 22 or 23. Young people who wish

to own a home are especially likely to need a mortgage since they have not had a long time to accumulate wealth.
The authors find that people who enter the credit
card market early are more likely to have a mortgage
at age 22 or 23 than people who do not get credit
cards early. This suggests that any potential damage
to an individual’s credit history might be outweighed
by having a longer credit history.
Another interpretation of this finding is that people
who want to get a mortgage early in life intentionally
enter the credit card market early in order to build a
credit history. To examine this possibility, the authors
again use the CARD Act to compare individuals who
chose to delay getting a credit card to those who
were forced to delay getting a card. They find that the
former are less likely to have a mortgage early in life
than the latter, which suggests that one motivation
for obtaining a credit card before age 21 is to build a
credit history in order to purchase a home early in life.
The final question the authors explore is whether
early entry into the credit card market has an effect
on credit card default later in life. They find that earlier entrants are actually less likely to have a serious
delinquency or default later in life, which casts doubt
on the idea that getting a credit card when young
results in more financial problems in the future.
Conclusion
The CARD Act offers researchers a way to study
the effects of credit card availability on a variety of
outcomes for young people. Contrary to the conventional wisdom, Debbaut, Ghent, and Kudlyak find
that young borrowers are not necessarily bad borrowers. In fact, they are less likely to experience a
serious delinquency than middle-aged credit card
users. The authors also find that people who choose
to get credit cards early in life are less likely to have a
serious delinquency or default than those who wait
to get credit cards. One reason, among many, why
young people might want to begin using credit cards
is to establish a credit history in order to purchase
a home early in life. These results suggest that early

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entry into the credit card market is not necessarily
risky or short-sighted behavior and that a prescriptive
approach to financial behavior might be inefficient
because it limits consumer choice.
Andra C. Ghent is an assistant professor of real
estate at Arizona State University. Peter Debbaut
is a research associate, Marianna Kudlyak is an
economist, and Jessie Romero is an economics
writer in the Research Department at the Federal
Reserve Bank of Richmond.
Endnotes
1

For example, see Walbaum, Michelle, “College Students Need to
Handle Debt, Credit Cards Wisely,” USA Today, August 14, 2009.

2

Debbaut, Peter, Andra C. Ghent, and Marianna Kudlyak, “Are
Young Borrowers Bad Borrowers? Evidence from the Credit
CARD Act of 2009,” Federal Reserve Bank of Richmond Working
Paper No. 13-09R, Revised November 2013.

3

A serious delinquency is defined as being more than 90 days
past due, having a credit card account in collections, having
a chargeoff, or declaring bankruptcy. A minor delinquency is
defined as being 60 days or 30 days past due.

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Federal Reserve Bank of Richmond, and include the
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Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

FEDERAL RESERVE BANK
OF RICHMOND
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