Subsidies in the Use of Revolving Credit

This paper deals with the measurement of subsidies in the use of consumer retail revolving credit under current local and institutional arrangements. The possibility of subsidies among credit users stems from three basic sources: (i) legal restrictions on rates, loan sizes and billing methods; (ii) the demand for this type of credit and the resulting use patterns; (iii) the “production” and pricing aspects of revolving credit. Based upon data from several surveys, estimates of credit costs and revenues based on twelve month account histories of credit use are calculated for each member of a sample of credit user. These estimates are then employed in a multivariate model to determine the nature and extent of subsidies present. The implications of these findings for public policy in the area of consumer credit are spelled out in the final section. Background The type of credit dealt with in this paper is normally associated with the credit card, although a small number of retail stores continue to provide this service in the form of “30 day” charge accounts commonly used ten or twenty years ago.