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Chapter 9 Patterns of Credit Card Use Among Low- and Moderate-Income Households Ronald J. Mann E nsuring that the poorer segments of the population have access to financial products and services has taken on increased significance as policymakers have come to understand the broad social ramifications of inclusive financial regimes. Access not only promotes savings but also enables the poor to manage cash flows and to meet basic needs such as health care, food, and housing. In the United States, the last few decades have seen remarkable progress on that front as low- and moderate-income (LMI) households increasingly use both mainstream products like deposit accounts and “fringe” products like payday lending, check-cashing services, and pawnshops (Barr, this volume; Caskey 1996; Hogarth, Anguelov, and Lee 2004; Mann and Hawkins 2007). At the same time, because many of those products exploit cognitive and financial constraints, policymakers are now increasingly moving beyond concerns about access to emphasize the need for safety in the design and marketing of financial products (Warren 2007). Credit cards cut across those concerns. With respect to access, the credit card is a profoundly democratizing instrument. It is only a slight exaggeration to say that any person with a Visa or MasterCard product can walk into the same stores and restaurants as the most elite trendsetters in our society and purchase the same goods and services, at the same prices. As status in a consumer society shifts to depend more heavily on consumption (rather than family wealth or occupational status), the credit card acts as a leveler of status (Cross 2000, 169–84; Frank 1999, ch. 4). The credit card also provides a remarkably flexible safety net that can be deployed in response to unexpected financial crises (Mann 2006). That protection is particularly important in the United States, where the public safety net is more porous than it is in many peer nations (Hacker 2002; Howard 2007). At the same time, the credit card is singled out as one of the most perilous consumer financial products. The prevalence of credit card use raises concerns that consumer spending is leading to overindebtedness (Schor 1999). In previous work, I present aggregate data that suggest a significant relation between increased credit card use and consumer bankruptcy filings at a national level (Mann 2006). The / 257 flexibility that makes the credit card so useful for households faced with unexpected difficulties is central to the danger that the product can bring to those who use it in excess (Littwin 2008a; Mann 2007; Mann and Hawkins 2007). Safety concerns are particularly important in connection with financial products for the poor (McCloud 2007). This chapter uses data from the Federal Reserve Board’s Survey of Consumer Finances (SCF) for 2004 to examine the penetration of credit cards into LMI markets. The chapter has two purposes. First, I discuss the rise of the modern credit market, emphasizing the segmentation of product lines based on behavioral and financial characteristics of customer groups (for more detail, see Mann 2007). Among other things, that trend involves the use of products aimed at LMI households that differ significantly from those aimed at middle-class households. Second, I describe the use of credit cards by LMI households: the amounts of debt they carry; the types of LMI households that carry debt; and how these households differ from higher-income households that carry debt. Despite their lower incomes, LMI households use credit cards almost as often as other households do. Indeed, measured as a share of income, the credit card balances that LMI cardholders carry are substantially higher than those of higher-income households. To refine the analysis, the chapter closes with the results of a multivariate regression analysis of the characteristics of LMI households with credit card debt. Generally, those results suggest that the demographic characteristics of LMI households that have credit card debt are different in material ways from the characteristics of those households in the overall population with credit card debt. The models I summarize here suggest that age, race, and education correlate with credit card use in the population at large. At least in these models, however, age and race become less important predictors, and education has only a marginal relation to credit card use in LMI households. In LMI households, by contrast, credit card use is most closely related to the use of other financial products: checking accounts, mortgage loans, and car loans. THE MODERN CREDIT CARD MARKET The rise of the credit card to dominance...


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