Sustained Credit Card Borrowing

Using a large panel of credit card accounts, we examine the dynamics of credit card borrowing and repayment in the United States and what these imply for the expected costs of credit card debt to consumers. Our analysis reveals that: (1) credit cards are predominantly used to borrow, (2) card debt is sustained for long periods and balances frequently rise before being repaid, (3) this debt is potentially more costly than anticipated. Specifically, we document that 82% of outstanding balances are debt and that 70% of this debt accrues to those borrowing continuously for a year or more. The expected annualized cost of a borrowing episode is 28% of its initial balance, or 13 p.p. higher than the average APR. Moreover, credit scores decline during episodes, further raising the expected cost of borrowing on a card.