Americans are back to borrowing more with credit cards. According to the most recent Federal Reserve data, they owe $952 billion, the biggest load of revolving consumer debt since 2009.
Part of the story is the same old story: Lots of cardholders still drag around debt, carrying over a balance every month and paying loads of interest. If offered a higher credit limit, many just can't resist borrowing every extra cent, especially if they're growing more confident about the economy. It's tempting to think we shouldn't be trusted with credit cards, that everyone should either pay in full every month or cut up the credit cards and use debit cards.
Sometimes, however, a credit card can come in handy — and not just when racking up rewards or buying a wider flatscreen. A new study from the National Bureau of Economic Research looked at job losses, examining how credit access affects the way Americans go about finding new jobs. It turns out that credit can often help jobseekers get back on their feet, especially those with lower income and fewer savings.
When workers lose their jobs, the study found, a higher credit limit allows them to take longer to find a new one. The study linked up an employment database with millions of TransUnion credit reports from 2001 to 2008. It showed that a credit limit increase equal to 10% of a person's prior annual salary can translate into their spending as many as three weeks more looking for a job.
Longer unemployment might sound like a bad thing, but it's often a mistake to jump at the first job opportunity because you're desperate for money. When unemployed people had access to more credit, the study found, they were choosier. They ended up with better jobs a year later, both higher-paying and at larger, more productive companies.
It's not really credit-card spending that allowed people to be pickier. It's the fact that they knew that cash was available if they needed it, giving them confidence to hold out a little longer.
“The potential to borrow affects search decisions regardless if credit lines are actually drawn down,” wrote the study's authors, Kyle Herkenhoff of the University of Minnesota, Gordon Phillips of Dartmouth College and Ethan Cohen-Cole of consulting firm Econ-One.
For the unemployed, then, a credit card with a generous limit can work much as unemployment insurance or emergency savings do. These extra resources give them the ability to apply for jobs, network, get retrained or even move to cities with more promising job markets.
The problem, however, with relying on credit-card debt after a job loss is that banks are notorious for cutting off credit just when customers need it most: during recessions. In 2009, the average credit-card limit plunged about 40%. So when lots of people lose their jobs, that credit-card cushion can vanish.
Another question raised by the study is what credit availability means for the economy after a recession. There's a “tension between the speed of recovery and health of recovery,” wrote the authors. “Tighter debt limits force constrained households to cut their job search short, taking relatively unproductive jobs that are more abundant.”
In other words, jobseekers and government policymakers have similar, difficult choices to make during a recovery: If people rush out to find any old job as quickly as possible, they can hurt their finances and productivity in the long run. But if they're encouraged to wait for the right job to come along, they — and the economy — may end up stuck in a rut.