Interpreting patterns in consumers’ credit card usage means understanding credit cards as two different products in one, according to West Virginia University economics research.

Scott Schuh, associate professor at the WVU John Chambers College of Business and Economics, discovered a stark divide between two groups of U.S. cardholders.

Of the roughly 80% of U.S. adults with a credit card, around half use their cards to make regular purchases, paying them off monthly without interest, Schuh said. The other half use their cards to finance purchases over time. They revolve their credit card balances, often for many years. These “revolvers” pay interest rates that averaged around 15% between 2001 and 2019 but have now jumped to around 22%.

However, Schuh and his coauthor discovered something puzzling when looking at the way these two distinct groups spend and borrow. For both kinds of cardholders, when their credit limits went up or down, so did their credit card debt.

Their model for understanding the consumer decision-making behind that puzzle appears in the Journal of Monetary Economics.

For cardholders who carry a balance, their available credit is their buffer against future shocks, Schuh said. When their credit increases, they effectively become wealthier and so they spend more. This increases their debt, which in turn lowers their lifetime consumption. Every time their credit goes up, their debt does as well, driven by their impatience to consume more now.

But for cardholders who pay in full each month, their spending is linked more closely to their current income. When their income goes up, their spending and credit card usage go up, and so does their credit limit.

“Both groups have stable patterns of credit card use, but for very different reasons,” Schuh said.

Credit is an important way for people just starting out in life to access money, he explained. Credit limits increase rapidly early on, rising by around 400% between the ages of 20 and 30, and continue to increase after age 30, although less quickly.

But even though credit increases are among the largest increases in liquidity early in adulthood, a person’s credit utilization tends to remain stable as they get older, declining only very slowly starting around age 50.

Someone using about 40% of their available credit in 2004 was likely still using about 40% in 2019, Schuh said, even if their income and credit line went up in the meantime.

Since credit lines typically increase with age, the temptation to run up a big balance and default should also increase — but Schuh found the opposite is true, with default rates declining as consumers age. When he incorporated increases in credit limits into his model, the numbers revealed that most people default on debt because of unexpected events beyond their control.

The model draws on data from credit bureaus such as Equifax, Experian and TransUnion. The data include all credit card debt associated with every specific consumer. Most previous models have relied on data that only reflect individual credit card accounts that aren’t linked together by the consumers they belong to.

In 2023, Schuh and his coauthor published a companion paper in the Journal of Money, Credit and Banking that offers a method of identifying revolving behavior in the credit bureau data, which does not report the distinction explicitly.

“Of course, there are more than just two distinct populations of credit card users,” Schuh acknowledged, “but separating people into those two groups helps explain simply several facts about credit card use and consumption, including why a person’s utilization of their available credit tends to be so stable over their life.”

Schuh said people who save a lot — whether for emergencies or retirement — might sometimes borrow money after a financial setback, but they will quickly pay off that debt.

On the other hand, someone who holds onto their credit card debt for years at 15% interest instead of paying it off is “persistently turning down a risk-free investment with a 15% return,” Schuh said. “That person will not find saving at a rate of 4% attractive.”

The research showed that the same “impatient” half of the population that borrows money at high interest rates on their credit cards is likely to spend extra cash quickly. Schuh’s model changes the picture of how people spend and save over their lifetimes by accounting for impatient consumers’ tendencies to spend unexpected windfalls like tax rebates.

“Because revolving consumers tend to increase their consumption proportional to their credit limit, our model suggests that policymakers could consider increasing credit limits in recessions to stimulate the economy, rather than increasing government spending by giving consumers a cash rebate,” he said.