The role of housing net worth in determining household credit limits

Abstract

This study examines the determinants of households' unsecured credit limits using the Survey of Consumer Finances published between 2004 and 2016. We estimate the marginal effects of household finance variables, demographic characteristics, and financial health conditions by using the generalized method of moment model. In the GMM estimation, we use instrumental variables of current net worth to resolve the endogenous variable problem that arises from the bicausal relationship between net worth and credit limits. We find that the marginal effect of net worth is significant in determining credit limits, while the effect of income is less significant or negligible. Housing net worth is even more significant for explaining credit limits than net worth itself. Our results imply that borrowers' willingness to repay unsecured debt is better inferred from net worth than from income.

Keywords: Unsecured Credit limit, Net worth, Income, Willingness to repay, Housing net worth, Endogeneity, Instrumental Variable

JEL Classification: D11, D12, D91, E21, G11