Deregulation,tax reform,and the use of consumer credit

This article analyzes the probable effects of recent deregulation of consumer credit markets and tax reform on household credit-use decisions. The results of the analysis suggest that deregulation of rates of charge for consumer credit contracts accounts for a substantial portion of the increase in consumer credit outstanding relative to household income since 1982. The effect would not originate from the extention of credit in newly deregulated markets to households that had not been able to get credit before (widening of credit use). Rather, it would come from the provision of greater amounts of credit to borrowers in general (deepening of credit use). With regard to tax reform, the probability of debt use is significantly higher for those households most likely to itemize deductions for federal income tax purposes. Holding the level of interest rates constant, tax reform that removes the deductibility of consumer interest is not expected to affect the amount of credit used relative to income but is expected to have a significant effect on the type of debt used by such households. They will likely be early adopters of home equity lines of credit. Their shift from consumer to mortage credit is expected to have a long-term negative effect on the credit quality of consumer credit portfolios.This work was partially supported by the Credit Research Center. Purdue University, West Lafayette, IN 47907.