Full text of Inside the Vault : Fall 2008

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THE
An Economic Education Newsletter from the Federal Reserve Bank of St. Louis

Volume 13, Issue 2 Fall ‘08

Extra Credit: The Rise of Short-term Liabilities
According to the 2004 Survey of Consumer Finances (SCF),
the percentage of families holding debt rose from 72.3 percent in
1989 to 76.4 percent in 2004. Among families holding debt, the
median value of the debt more than doubled during that time from
$22,000 to $55,300 (in 2004 dollars). These numbers reflect both
a rise in collateralized debt (e.g., mortgages) and uncollateralized
debt (e.g., credit cards).
This shift toward more debt appears to have long-term ramifications for the U.S. economy, as evidenced by the growing number of
personal bankruptcies over recent decades. Perhaps playing a role
in this rise is the increase in debt accumulated via credit cards and
payday loans.

Paper or Plastic?
In 1989, a total of 55.8 percent of American families owned at
least one credit card; in 2004, a total of 74.9 percent owned at
least one card. According to several economic studies, the characteristics of credit card holders have changed over time to include
people who are riskier for the lenders. For example, a higher
percentage of single people and renters now have a credit card.
Also, workers with less job seniority, lower incomes and unskilled
jobs are now more likely to hold a credit card. Attitudes toward
borrowing have changed as well; for example, people increasingly
borrow to finance things like vacations and living expenses.
Although credit card usage has increased across the income
spectrum, the largest increases occurred among lower-income
groups. (See the accompanying table.) Among those in the lowest
20 percent of the income distribution, the fraction with credit card

debt nearly doubled between 1989 and 2004, and their median
credit card debt increased to $1,000 from $400. For those in
the next lowest 20 percent, the fraction with credit card debt
Continued on Page 5

Credit Card Debt by Income Distribution

Percentage with credit card debt
1989

2004

All families

39.7

46.2

Percentiles of income
< 20 percent

15.0

20 – 39.9 percent

Median credit card debt (2004 dollars)

Difference

1989

2004

6.5

$1,300

$2,200

$900

29.1

14.1

$400

$1,000

$600

28.2

42.5

14.3

$900

$1,800

$900

40 – 59.9 percent

48.8

55.0

6.2

$1,200

$2,200

$1,000

60 – 79.9 percent

57.4

56.2

–1.2

$1,500

$3,000

$1,500

80 – 100 percent

49.0

48.1

–0.9

$2,600

$3,400

$800

SOURCE: 2004 Survey of Consumer Finances. See www.federalreserve.gov/pubs/oss/oss2/2004/scf2004home.html.

Difference

1

Q.
A.

report. When a creditor requests a borrower’s credit report, a credit score can
be generated based on the information
in the credit report. This score can also
be purchased by lenders. Credit scores
are one of the factors used by lenders to
determine not only the amount of credit
(if any) to extend to a borrower, but also
the terms of the loan, e.g., the interest
rate charged.

What is a credit score?

When someone wants to borrow
money, the lender checks the person’s
credit score. A credit score is a number
that predicts the likelihood that a borrower will be able to repay the loan as
agreed. Credit-reporting agencies are
businesses that collect information about
consumers’ loan and bill payment histories. Credit agencies keep these records
and, upon request, provide information to creditors in the form of a credit

Q.
A.

What are FICO scores?

FICO scores are the most widely
used credit scores. FICO stands for Fair
Isaac Corp., the company that developed
the FICO scores system of evaluation.
Fair Isaac develops scores based on the
information that is provided by three
major credit-reporting agencies: Trans­
Union, Equifax and Experian. Fair Isaac
sells the scores to the credit-reporting
agencies. Lenders buy FICO scores from

one or all three of the major creditreporting agencies. FICO scores vary, but
generally the scores are between 500 and
850. FICO scores between 700 and 850
indicate that a borrower is very likely to
repay loans and other debts. FICO scores
lower than 600 indicate that a borrower
may not be a good credit risk.

Q.
A.

How are FICO scores determined?

FICO scores are determined using
an equation that evaluates information
from a consumer’s credit report and
that compares the results to the result
of many other consumers’ credit reports
over time. The information from a
credit report that is used to determine a
FICO score can be grouped into five categories: payment history, amounts owed,
length of credit history, new credit and
types of credit used.
Continued on back page

Economic Snapshot
What is the household debt service ratio?

Second Quarter 2008

(Percent change at an annual rate from the preceding period)

Q3-’07

Q4-’07

Q1-’08

4.8%

-0.2%

0.9%

Growth rate —
Real Gross Domestic Product

Q2-’08
1.9%*

What is disposable personal income?

Inflation rate —
Consumer Price Index

2.8%

5.0%

4.3%

5.0%

Civilian Unemployment Rate

4.7%

4.8%

4.9%

5.3%

*Advance estimate
Household Debt Service Payments as a Percent of Disposable Personal Income (TDSP)
SOURCE: Board of Governors of the Federal Reserve System
15

Percent

In 1980, household financial obligations represented slightly more
than 11 percent of disposable personal income.

13

What is the trend for household financial obligations as a percent of disposable personal income
since 1995?

12

11

Since 1995, household financial obligations as a percent of disposable personal income have been increasing.
1985

1990

1995

2000

2005

Shaded areas indicate U.S. recessions as determined by the NBER.
2008 Federal Reserve Bank of St. Louis: research.stlouisfed.org

2

In the United States, personal income includes all income received
by U.S. residents in a given year from all sources. Personal income
is the sum of wage and salary payments, other labor income, rental
income, dividend and interest income, and transfer payments to
individuals, such as welfare and unemployment insurance. Disposable personal income is the amount of personal income that remains
after personal taxes are subtracted. It is the amount of personal
income available to people for spending and saving.

Approximately what percent of disposable personal
income were household financial obligations in 1980?

14

10
1980

The household debt service ratio (DSR) is an estimate of the ratio
of debt payments to disposable personal income. Debt payments
consist of the estimated required payments on outstanding mortgage and consumer debt.

2010

Bulletin Board

NEW! Curriculum and Materials
from the Federal Reserve Bank of St. Louis

Available December 2008
GDP and Pizza: An Online Instructional Module for
High School Classrooms
This is a two-class-period instructional program including online preand post-test and a complementary in-class activity for pre- and
post-assessment. The program is appropriate for high school social
studies classes. Students learn economic content and its relevance.

Twenty-five Cents’ Worth of History
Activity Book and Teachers Guide
This is the second activity book in our Piggy Bank Primer series for
elementary classrooms. The booklet focuses on states and coins in
the Eighth District.

It’s Your Paycheck
This is a set of active lessons for high school personal finance
classrooms. The lessons focus on: human capital, wages, taxes,
budgeting, saving, credit rights and responsibilities, payday loans,
rent-to-own contracts, credit cards, and credit reports.

Cards, Cars and Currency
This is a set of active lessons for high school personal finance
classrooms. These lessons focus on three specific areas of personal
finance: credit cards, debit cards and car purchases.
To schedule workshops based on these materials for
your school or school district, or for additional information, contact:
Little Rock: Billy Britt—501-324-8368 or
billy.j.britt@stls.frb.org
Louisville:

Dave Ballard—502-568-9257 or
david.b.ballard@stls.frb.org

Memphis:

Jeannette Bennett—901-579-4104 or
jeannette.n.bennett@stls.frb.org

St. Louis:

Mary Suiter—314-444-4662 or
mary.c.suiter@stls.frb.org

Federal Reserve Bank of St. Louis

Federal Reserve Bank of St. Louis—Memphis Branch

The Great Depression

Personal Finance
from A to Z

A one-day professional development workshop for
9th-to-12th-grade educators

A two-day St. Louis Fed conference for K-12 educators
sponsored by the
Federal Reserve Bank of St. Louis—Memphis Branch

Curriculum Workshop

When and Where:
Tuesday, Nov. 18, 2008
8:30 a.m. – 2:30 p.m.
Federal Reserve Bank of St. Louis
One Federal Reserve Bank Plaza
St. Louis, MO 63102

To register or for more information:
There is no fee, but registration is required.
Register online at www.stlouisfed.org/education/
conferences/2008Nov18StLouis.html. To learn more,
contact Mary Suiter at 314-444-4662 or mary.c.suiter@
stls.frb.org.

When and Where:
The ABCs of Personal Finance: Wednesday, Nov. 5, 2008
Personal Finance to XYZ: Thursday, Nov. 6, 2008
8:30 a.m. to 4 p.m.
Marriott East
2625 Thousand Oaks Blvd.
Memphis, TN 38118

To register or for more information:
There is no fee, but registration is required. Register online at
www.stlouisfed.org/education/conferences/2008Nov5-6Memphis.html.
To learn more, contact Jeannette Bennett, 901-579-4104 or
1-800-333-0810, ext. 79-4104, or jeannette.n.bennett@stls.frb.org.

3

Bulletin Board

Federal Reserve Bank of St. Louis—Little Rock Branch

Essay Contest

Economic Summits

Hot Topics in the News

Grades 5-12

Building Excellence in Economic and
Financial Literacy in the Social Sciences

The Little Rock, Louisville and Memphis

When and Where:
University of Central Arkansas
Oct. 17, 2008, from 8 a.m. to 4 p.m.

St. Louis are sponsoring an essay contest for

branches of the Federal Reserve Bank of
students in grades 9-12. Each office will select
the winning essays from area students.

To register or for more information:
Register online at www.stlouisfed.org/education/conferences.html.
To learn more, contact Julie Kerr at 501-324-8296 or
julie.a.kerr@stls.frb.org.

Going Green: Benefits and Costs

Prizes (awarded in each location) are:
First place

$500 savings bond

Second place $300 savings bond
Third place

$200 savings bond

Fourth place

$100 savings bond

For more information or to register for the

When and Where:
University of Arkansas at Fayetteville
Nov. 7, 2008, from 8 a.m. to 4 p.m.

contest, visit www.stlouisfed.org/
education/essay.

To register or for more information:
Register online at www.stlouisfed.org/education/conferences.html.
To learn more, contact Julie Kerr at 501-324-8296 or
julie.a.kerr@stls.frb.org.

Federal Reserve Bank of St. Louis—Louisville Branch

Econ Camp South

A two-day conference for high school economics teachers, sponsored by the Federal Reserve Bank of St. Louis—
Louisville Branch, the Indiana Department of Education, and the George and Frances Ball Foundation
Learn more about the economics concepts identified in the

When and Where:

Indiana Economics Standards while sharing best teaching

The program is being held in Princeton, Ind., beginning at

practices and helping to promote economics in the high

4 p.m. on Oct. 21 and ending at 2:45 p.m. on Oct. 22.

school curriculum. Hear from economics professors and

To register or for more information:

St. Louis Fed speakers—and enjoy a unique experience,

Go to www.econed-in.org/econcamps.asp. Register online

complete with an evening campfire and refreshments.

by Oct. 7, 2008. Registrations are first-come, first-served.

Bank
Contacts
4

Little Rock – Billy Britt 501-324-8368
Louisville – David Ballard 502-568-9257

Memphis – Jeannette Bennett 901-579-4104
St. Louis – Mary Suiter 314-444-4662

Extra Credit
Continued from front cover

increased by 51 percent, and their median
debt doubled to $1,800.
Between 1992 and 2006, the total
dollar amount of credit card loans nearly
tripled, while the dollar amount of loans
that are 90 days delinquent more than

According to the Center for Responsible
Lending (CRL), from 2000 to 2003, the
industry quadrupled in size to $40 billion.
Payday loans are designed to lend small
amounts of money for short amounts of
time, usually two weeks. Typical interest
rates for two weeks can range from 15 to
18 percent, which translates into about a
400 percent annual interest rate. Payments

I

n addition to carrying a balance, borrowers do not
appear to rush to pay off their credit cards. Several
economists have found that some consumers carry
credit card balances even though they have sufficient
funds in the bank to pay off their high-interest debt.

tripled. At the end of 2006, FDICinsured institutions had $385 billion in
credit card loans to individuals, and $6.5
billion were past due 90 days or more
(1.7 percent of the total).

What’s in the Balance?
In addition to carrying a balance, borrowers do not appear to rush to pay off
their credit cards. Several economists
have found that some consumers carry
credit card balances even though they
have sufficient funds in the bank to pay
off their high-interest debt. Economist
Irina Telyukova found that about 28
percent of those surveyed had at least
$500 both in credit card debt and liquid
assets. This group held an average
credit card debt of $5,766 and an average of $7,237 in liquid assets. Furthermore, the average interest rate on the
debt was 13.7 percent, compared with
a rate of only about 1 percent on their
liquid assets.
Telyukova hypothesized that households keep liquid assets for payments
where cash is required. While many of
these expenses are predictable, others
may arise in an emergency. To protect
themselves in the event such a case arises,
households may forgo paying off credit
card debt in order to keep cash available.

I Want It All, and I Want It Now
Another increasingly common form
of short-term debt is the payday loan.

are due on the borrower’s payday, but the
loan may be renewed with additional fees.
Similar to credit cards, payday loans
have become popular among lower-income
households. A CRL report asserts that 90
percent of lenders’ revenue comes from
borrowers who have five or more loans per
year. To demonstrate, an average borrower
renews a loan eight times and ends up paying back $793 for a $325 loan. The CRL
estimates that Americans paid $4.2 billion
in payday loan fees in 2005.
Economists Paige Skiba and Jeremy
Tobacman found that applicants for payday
loans from a particular lender in Texas had
an average monthly income of $1,699 and
$235 in their checking account. Additionally, 77 percent of the applicants were black
or Hispanic and 62 percent were women.
The results of the study suggest that access
to loans can be habit-forming. Within one
year, a consumer whose first-time application for a payday loan was approved would
apply for another loan an average of 8.4
more times; in comparison, a consumer
whose first-time application was rejected
would apply 1.8 more times on average.

You Get What You (Don’t) Pay For
Americans appear willing to trade
substantial interest payments for access to
short-term credit markets. But does this
new behavior have detrimental long-term
effects? According to a study by economist
Michelle White, an increase in the amount
of revolving debt (for example, credit card

debt) per household coincided with an
increase in personal bankruptcy filings
from the 1980s to 2005. There were 5.4
times more bankruptcies in 2004 than in
1980, and revolving debt per household
was 4.6 times larger in 2004 than in 1980.
White discussed other possible explanations for the increase in bankruptcy filings,
such as job loss and medical bills. These
types of adverse events, however, have
not increased since 1980. She concluded,
therefore, that the rise in personal bankruptcies can be attributed in large part to
the rise in credit card debt.
Similarly, the payday loan applicants in
Skiba and Tobacman’s study were six times
more likely to file for bankruptcy between
January 2001 and June 2005 than the
general population in Texas.
Credit cards and payday loans can be
convenient for some people as a means
to borrow money for a relatively short
period of time. However, the recent rise in
short-term liabilities—especially by lowerincome households—may have long-term
implications for the economy, as demonstrated by the apparent correlation with
bankruptcy filings.
This article was adapted from “Extra Credit:
The Rise of Short-term Liabilities,” which was
written by Kristie M. Engemann, a research
analyst, and Michael T. Owyang, an economist, both of the Federal Reserve Bank of St.
Louis, and was published in the April 2008
issue of The Regional Economist, a St. Louis
Fed publication.

Classroom Discussion
1. Why don’t households that have
cash in savings use the cash to pay
existing credit card debt?
2. What are payday loans?
3. How does the increase in revolving
debt seem to be related to bankruptcy filings?

For a lesson plan to accompany this
article, go to www.stlouisfed.org/
education/itv_lesson_plan.html.
5

Continued from Page 2

Q.	Does a high FICO score guarantee
that a consumer will get a loan?

A.

No score guarantees that a consumer will get a loan. A score is one of
the factors in a lender’s credit decision.
Although FICO scores are important to
lenders, every lender has its own strategy
for lending, including the level of risk it
finds agreeable for a given credit record.
There is no single “cutoff score” used by
all lenders.

Q.

How do borrowers get a better
FICO score?

A.

There is no quick fix. Raising a
FICO score takes time. Types of credit in
use, payment histories, amounts owed,
length of credit histories and new credit
are all factors in creating a consumer’s
FICO score. The best way for a consumer
to ensure a good FICO score is to manage
his or her credit responsibly over time.

The content for Q & A was compiled by Billy
Britt, economic education specialist at the St.
Louis Fed’s Little Rock Branch, and was largely
adapted from Fair Isaac Corp.’s “Understanding Your FICO Score.” To learn more about
credit scoring, visit Fair Isaac Corp.’s web
site www.myfico.com/crediteducation. For a
free credit report, visit www.federalreserveconsumerhelp.gov and click on the “Credit
Report” tab.

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Federal Reserve Bank of St. Louis
P.O. Box 442
St. Louis, Mo. 63166-0442
Inside the Vault is written by
Dawn Conner, economic
education coordinator, and
Mary Suiter, manager of
economic education, at the
Federal Reserve Bank of
St. Louis, P.O. Box 442,
St. Louis, Mo., 63166. The
views expressed are those of
the authors and are not necessarily those of the Federal
Reserve Bank of St. Louis or
the Federal Reserve System.
Please direct all comments
and questions about the publication to 314-444-4662 or
mary.c.suiter@stls.frb.org.