For Better and for Worse? Effects of Access to High-Cost Consumer Credit

32 Pages Posted: 15 Jul 2016

See all articles by Christine Dobridge

Christine Dobridge

Board of Governors of the Federal Reserve System

Date Written: 2016-07

Abstract

I provide empirical evidence that the effect of high-cost credit access on household material well-being depends on if a household is experiencing temporary financial distress. Using detailed data on household consumption and location, as well as geographic variation in access to high cost payday loans over time, I find that payday credit access improves wellbeing for households in distress by helping them smooth consumption. In periods of temporary financial distress—after extreme weather events like hurricanes and blizzards—I find that payday loan access mitigates declines in spending on food, mortgage payments, and home repairs. In an average period, however, I find that access to payday credit reduces well-being. Loan access reduces spending on nondurable goods overall and reduces housing- and food-related spending particularly. These results highlight the state dependent nature of the effects of high-cost credit as well as the consumption-smoothing role that it plays for households with limited access to other forms of credit.

Keywords: Household finance, Consumption, Consumer credit, Payday loans

JEL Classification: D14, E21, G23

Suggested Citation

Dobridge, Christine, For Better and for Worse? Effects of Access to High-Cost Consumer Credit (2016-07). FEDS Working Paper No. 2016-056. Available at SSRN: https://ssrn.com/abstract=2810054 or http://dx.doi.org/10.17016/FEDS.2016.056

Christine Dobridge (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 912-4341 (Phone)

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