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On the relationship between unemployment and late credit card payments

The first shaded region on the FRED graph above indicates the 2008-09 Great Recession. In that recession, the seasonally adjusted unemployment rate (red line, right axis) nearly doubled from 5% in December 2007 to 9.5% in June 2009. At the same time, seasonally adjusted credit card delinquency rates (blue line, left axis) increased from 4.6% in the fourth quarter of 2007 to 6.8% in second quarter of 2009. In short, as workers became unemployed, some stopped making on-time credit card payments.

Research by Athreya, Sánchez, Tam, and Young (2015) shows how this relationship can emerge in a model where low-income households may skip credit card payments (“informal default”) to sustain a minimum level of consumption.

The FRED graph also shows the most recent recession, caused by the COVID-19 pandemic, from February 2020 to April 2020. During this time, the seasonally adjusted unemployment rate spiked from 3.5% to 14.8%, a more than fourfold increase. However, unlike in the Great Recession, seasonally adjusted credit card delinquencies declined. Thus, there was a slight negative correlation between unemployment and credit card delinquency rates. What would cause such different behavior in credit card repayment during this recession?

It is probably a mix of several reasons: easy access to forbearance programs, unusually generous unemployment insurance programs, and government stimulus checks. Of course, more research is needed to understand the specific role of each of these programs.

How this graph was created: Search for and select “Delinquency Rate on Credit Card Loans, All Commercial Banks.” Open the graph, click on “Edit Graph,” open the “Add Line” tab, and search for and select “UNRATE.”

Suggested by Juan M. Sánchez and Olivia Wilkinson.

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