Unemployment and Credit Card Delinquency: The

Macro Picture
Ritika Sinha

1 Introduction

Historically, long run data on US GDP shows alternating patterns of in‡ation and unemployment as asso-

ciated with business cycles. Delinquency rates on consumer credit card loans are seen to follow the same

pattern as national unemployment rates but with lower variations (see Graph-1). Ausubel writes about

the cyclical nature of credit card defaults in tandem with GDP levels, working at a macro-economic level.

The motivation of this paper is to test if the movement of unemployment rates and other macroeconomic

variables is statistically signi…cant in determining credit card delinquency rates.

2 Literature Review

Sissoko (2006) uses a generic growth model to evaluate macroeconomic determinants of delinquency rates

over a ten year period from 1994 to 2004. The paper …nds that unemployment, interest rates, debt to personal

income ratio, delinquency rate lagged one period are positively and signi…cant related to delinquency rates,

while credit supply is positively but not signi…cantly related. Cointegration tests were performed on the

dependent and independent variables and a long-term equilibrium relationship was found. GDP growth and

policy decisions may a¤ect delinquency through interest rates and unemployment rates (both statistically

signi…cant).

A 2003 paper by Agarwal and Liu examines panel data for 700 thousand accounts, using variables

representing individual account characteristics like balance, credit limit, interest rate, state-speci…c “shock”

variables like divorce rates, bankruptcy …lings, and health coverage, legal variables and county-speci…c unem-

ployment rates. It uses the proportional hazard model to estimate the conditional probability of delinquency

at time t and concludes that unemployment rates are signi…cant in determining delinquency rates in all

speci…cations, irrespective of the lag length. It also concludes that the line of credit as a proxy for the supply

1
side is negatively related to delinquency.

Grieb, Hegji and Jones (2001) use the …ndings of Paquin and Weiss (1998) on bankruptcy as a determinant

of credit card delinquency as a starting point. The paper uses the …rst di¤erences of the dependent and

independent variables (both relative and absolute) to correct for the presence of autocorrelation and the

results vary. It tests the idea of selective default when borrowers tend to default earlier on credit card loans

to ful…ll other debt obligations and …nd that the e¤ect tends to be felt after a lag of one period of increase

in revolving debt.

There is a multitude of papers on the e¤ect of bankruptcy …ling decision on credit card delinquency.

Stavins uses logit regression on SCF 2004 panel data to assess both the demand (borrower’s characteristics)

and supply (lender) sides of credit card markets, including the e¤ect of recent bankruptcy legislation. Ausubel

writes about the self-correcting nature of credit card lending, making bankruptcy legislation insigni…cant in

default rate determination. Both Ausubel and Stavins explain the adverse selection problem faced by banks

in determining default risk of borrowers. Black and Morgan talk about the changing characteristics of credit

borrowers, increasing default risk in general.

3 Model Description

Credit card delinquency is postulated to be dependent on several macro economic variables, supply side

factors and personal reasons. Several papers evaluate the signi…cance of personal factors like divorces, bank-

ruptcy, health insurance costs, age, etc. using cross-section individual survey data (Agarwal and Liu). This

model uses aggregate time series data to evaluate the e¤ect of economy-wide factors like the unemployment

rate, all credit card interest rates, debt-income ratio (DSR), bankruptcies; and the supply-side e¤ect through

total revolving credit outstanding.

The model formulated is:

delratet = 0 + 1 unemprate + 2 dsr + 3 intrate + 4 revcred + 5 bank +t+ t

where:

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 delrate is Delinquency rate on credit card loans; All commercial banks SA1

unemprate is Unemployment Rate of Civilian Labour Force SA

dsr is Debt Service Ratio NSA

intrate is Commercial Bank Interest Rate on Credit Card Plans - All Accounts NSA

revcred is Log of Consumer Revolving Credit Owned by Commercial Banks NSA

bank is Log of Bankruptcies in units

t is Time trend

The Board of Governors’delinquency rate is computed by taking the dollar amount of credit card loans 30

days or more past due (accruing and not accruing interest) for the quarter and dividing by the level of credit

card loans outstanding at the end of the quarter. The unemployment rate (in percentage terms) refers to the

proportion of the civilian labor force that is unemployed. The relationship being tested for signi…cance here

is: as unemployment rises, more people would tend to default on their credit card payments. The household

debt service ratio (DSR) is the ratio of debt payments to disposable personal income. Debt payments consist

of the estimated required payments on outstanding mortgage and consumer debt. The variable for interest

rate refers to the average interest rates charged by commercial banks on all credit card loans. These interest

rates are the terms of credit set by the credit card issuers (supply side), as a fee for credit card borrowing.

Di¤erential interest rates are often charged, depending on the credit risk that the borrower poses. Revolving

Credit outstanding refers to the amount of revolving credit lent out by commercial banks. This is used as

a proxy for the supply side of credit card loans. Log of Bankruptcy is the natural log of bankruptcy …lings

per quarter at US Courts in units.

4 Methodology and Interpretation

The model was estimated using quarterly data for all variables over an 18 year period, from 1991(Q1) to

2008(Q2). The results from the OLS regression show a goodness of …t of 54.91% (R2 = 0.5491, adjusted R2

= 0.5062). All of the variables seem to be positively signi…cant in determining delinquency rates on credit

cards, except lrevcred, which is signi…cant but negatively related, all evaluated at the 5% level of signi…cance.
1 SA means seasonally adjusted

NSA means non-seasonally adjusted

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 The data shows strong positive serial correlation (lag 6), as proven by the Breusch-Godfrey test LM

2
statistic = 31.120, against the critical value = 12.59. Also, when the residuals (uhat) are regressed

against the lagged residuals (luhat), luhat is signi…cant with the t statistic = 6.56. To correct for serial

correlation, the Newey-West robust standard errors were used with a lag of 6 periods, su¢ cient for quarterly

data. Interestingly enough, as the bandwidth changes (6, 20, 55), the signi…cance of the variables may also

change thus showing that the standard errors are not robust for this model. Adjusting for this shift using

the Kiefer-Vogelsang tables at 97.5% where 2 b = 0.1, the following results are found for lag (6).

Unemployment rates are statistically signi…cant (with a t-statistic of 2.64) and positively related ( 1 =

0.49) to credit card delinquency rates. A one percentage point increase in unemployment would bring about

a 0.49 percentage point increase in delinquency. The intuition is that due to unemployment, credit card loans

become an alternate source of funds for consumer spending (Agarwal and Liu). Borrowers tend to increase

credit card spending to tide over temporary loss of income, with the intention of repaying the debt as soon

as they are employed again. If unemployment persists beyond one period, unemployed borrowers are likely

to be delinquent on their credit card interest payments. In addition to this, the demographic of workers

who use credit card is changing from only white-collared workers to a larger number of blue-collared workers

(Black and Morgan). As these sections are more prone to and more a¤ected by lay-o¤s and phases of job-loss,

unemployment now has a greater impact on credit card delinquency than earlier. According to Sissoko, the

economic climate in the aggregate economy and policy decisions for …scal and monetary expansion or control

a¤ect the delinquency rates by lowering or raising unemployment rates.

The debt-service ratio (DSR) has a high coe¢ cient ( 2 = 42.69) but is not statistically signi…cant. The

ratio of debt payments to personal disposable income depends on federal tax rates, marginal propensity to

consume and earnings (Sissoko). One would suppose that the increasing proportion of debt to disposable

personal income would force individuals to default on credit card interest payments and other debt payments

as well. However, both, Grieb, Hegji and Jones as well as Agarwal and Liu …nd that consumers tend to

selectively default on credit card payments to tide over other debt obligations like mortgage payments.

Unemployment is also related to the notion of selective default as it causes a loss of earnings and income

stream, thus in‡ating the DSR.

2b = (g + 1)/n from the Kiefer-Vogelsang table

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 Interest rates, as expected, are extremely signi…cant in determining delinquency rates, at all lag lengths.

3 = 0.57, thus indicating that a one percentage point increase in interest rates on credit cards will increase

the delinquency rate by 0.57 percentage points. As interest rates increase, credit card spending will become

more expensive, thus causing more rate-sensitive people to default on credit card loans to channelize the

income towards repayment of other debt. Where interest rates are concerned, banks often face an adverse

selection problem. According to Stavins, as interest rates increase from a lower level, consumers who orig-

inally did not want to borrow would exit the market, due to the high cost of loans. On the other hand,

risky borrowers with a higher probability of default would enter the market, raising delinquency rates. The

process would be cyclical if banks chose to charge higher interest rates to account for these default losses. As

adverse selection takes place, banks choose not to alter the interest rates too much, either way (Ausubel).

Log Revolving Credit (supply of loans) has a negative relationship ( 4 = -4.16) but is insigni…cant in

determination of credit card delinquency rates. The relationship shows that a one unit increase in revolving

credit outstanding would decrease delinquency rates by 4.16%. This relationship is contrary to Sissoko’s

…ndings but similar to Agarwal and Liu’s results on line of credit. This relationship is possibly because

consumers now have a larger amount of loans forthcoming and thus would not need to default on loans

to channel that income elsewhere. Also, market e¢ ciency would dictate that as supply of loans increases,

interest rates become competitive, thus reducing the need to default.

Log Bankruptcy is another variable that is positively signi…cant in explaining delinquency rates. A one

unit increase in bankruptcy …lings leads to a 0.8% rise in default rates ( 5 = 0.801) According to Ausubel,

banks have begun to realize the importance of default risk that arises on lending to borrowers with high

debt-income ratios since they are more likely to …le for bankruptcy. Delinquency rates were at their highest

during the bankruptcy crisis in the new millennium. However, banks continue to lend to risky borrowers at

as long as the interest rate spread is high enough to make it a pro…table venture. When they become too

risky, banks are unwilling to lend to ‘subprime’borrowers, which in turn will motivate fewer people to …le

for bankruptcy, reducing charge-o¤ rates.

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5 Conclusion

The model shows that macroeconomic factors and the economic environment have an impact on credit card

delinquency rates. Unemployment rates, interest rates and bankruptcy …lings are all positively signi…cant;

DSR is positively related but insigni…cant and revolving credit (supply side) is negatively related and insignif-

icant in explaining delinquency rates. In a period of GDP growth, when the Monetary and Fiscal policies

of the government try to control the in‡ationary trend, unemployment rates rise and so do bankruptcy and

delinquency rates. On the other hand, when the economy is in a recession and policy tries to inject growth

and con…dence into the economy by increasing employment, delinquency rates will fall. Thus delinquency

rates are in‡uenced by macroeconomic factors, although the e¤ect of these may be lagged depending on how

long it takes for policy e¤ects to be felt in the economy.

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 References
Agarwal, Sumit and Liu, Chunlin, ‘Determinants of Credit Card Delinquency and Bankruptcy:

Macroeconomic Factors’, Journal of Economics and Finance, Spring 2003

Ausubel, Lawrence M., ‘Credit Card Defaults, Credit Card Pro…ts, and Bankruptcy’, American

Bankruptcy Law Journal, Vol. 71, Spring 1997, pp. 249-70

Ausubel, Lawrence M., ‘Adverse Selection in the Credit Card Market’, Working Paper,

Department of Economics, University of Maryland, June 17, 1999

Ausubel, Lawrence M., ‘Personal Bankruptcies Begin Sharp Decline: Millennium Data Update,’

Short Report, Department of Economics, University of Maryland, January 18, 2000

Black, Sandra E. and Morgan, Donald P., ‘Meet the new borrowers’, Current Issues in

Economics and Finance, Federal Reserve Bank of New York, February 1999

Grieb, Terrance, Hegji, Charles, Jones, Steven T., ‘Macroeconomic factors, consumer behavior, and

bankcard default rates’, Journal of Economics and Finance, Fall 2001

Kiefer, Nikolas and Vogelsang, Timothy, ‘A New Asymptotic Theory for Heteroskedasticity-Autocorrelation

Robust Tests’, Econometric Theory, 2005, vol.21, pp. 1130-1164

Sissoko, Macki, ‘Determinants of Delinquency Rate on Commercial Banks Mortgage and Credit Card Debts

Outstanding: Empirical Evidence from 1991-2004 Quarterly Data,

The’, Credit & Financial Management Review, Fourth Quarter 2006

Stavins, Joanna, 2000. ‘Credit card borrowing, Delinquency, and Personal bankruptcy’, New England

Economic Review, Federal Reserve Bank of Boston, issue July, pp. 15-30

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Tables
OLS Coef OLS SE NW Lag 6 NW Lag 20 NW Lag 55

Variable Name

time :0685098 :0229642 :0334598 :0335294 :0312798

dsr 42:69974 15:09035 20:3788 20:24713 14:70823

unemprate :490026 :1276306 :1855867 :2026725 :1763826

interestrate :5732414 :0890465 :1146193 :11153 :0694581

lbank :8010539 :1639233 :3514975 :3657106 :3092508

lrevcred 4:167579 1:682891 2:591869 2:882617 2:620044

_cons 82:70186 41:49536 67:87871 77:07818 71:21239

* Indicates signi…cance at the 5% level using Kiefer Vogelsang values