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RESEARCH Credit and the Family: The Economic Consequences of Closing the Credit Gap of US Couples

Promoting equal access to consumer credit has long been a policy goal in the United States. But is credit shared equally between spouses? There are reasons to believe that disparities in credit persist within a marriage. Survey evidence shows that perceived financial inequity between spouses is among the top predictors of divorce in the U.S.1 For married couples with a single household income–roughly half of married couples with at least one child2– breadwinners likely have higher borrowing capacity than their spouses, because income determines at least part of one’s ability to borrow. However, the role of access to credit within a marriage has been understudied, and we know little about the extent and implications of credit disparities between spouses. 

This research brief summarizes results published by Kim (2021), which uses de-identified JPMorgan Chase financial accounts data to document gaps between spouses in credit access and consumption.3 The research evaluates the impact of the 2013 reversal of the Truth-in-Lending-Act (TILA) on these intra-household inequalities. Before November 2013, TILA Section 150 – which imposes ability-to-pay requirements in the U.S. consumer credit card market -- required credit card issuers to evaluate applicants’ independent (i.e., individual) income in their lending decisions. This independent income requirement raised concerns that credit access for secondary earners or stay-at-home spouses may be restricted because these spouses had access to household income but had limited income of their own. The statute was reversed in November 2013 to allow credit card issuers to consider household income, facilitating access to credit for secondary earners and stay-at-home spouses. How did spouses differ in their access to credit and consumption patterns prior to November 2013, and did the TILA reversal changes those patterns?

Inequalities between spouses in access to credit and consumption prior to the TILA reversal

  • There were large gaps in credit access between spouses (Figure 1): Before the TILA reversal, primary earners had access to 97% and secondary earners or stay-at-home spouses (henceforth, “secondary earners”) 29% of total available credit limits at the household-level, indicating the average credit gap between spouses was 68%.4 This implies prior to November 2013, secondary earners could borrow 30 cents for every dollar primary earners could borrow. The gap in independent credit access between spouses is even larger (72%), suggesting secondary earners were much less likely than primary earners to be able to borrow independently from credit markets prior to the TILA reversal.
  • There were large gaps in consumption within the household: Before the TILA reversal, primary earners consumed 59% and secondary earners 41% of total monthly household consumption, indicating the average consumption gap between spouses of 18%. This implies secondary earners consumed 69 cents for every dollar consumed by primary earners prior to the TILA reversal.

 

Figure 1: There were large gaps between spouses in access to credit and consumption prior to the TILA reversal.

What happened when secondary earners were allowed to apply for credit based on household income as a result of the 2013 TILA reversal?

  • Secondary earners’ credit access increased by more than $1,000 over the two-year period after the TILA reversal (Figure 2). This increase is economically meaningful, representing 40 percent relative to secondary earners’ baseline average monthly consumption, where the baseline period refers to one full year before the reversal, October 2012 to October 2013. The effects are larger for stay-at-home spouses, consistent with the TILA reversal having a larger effect on spouses who have limited income of their own.
  • The TILA reversal increased secondary earners’ consumption level and share of household consumption (Figure 2). Secondary earners’ consumption increased by 14 percent relative to their baseline average monthly consumption, or roughly $340. The share of consumption allocated to secondary earners increased by 5 percent relative to their pre-reversal average monthly consumption share, indicating that spouses shared consumption more equally.
  • The TILA reversal increased household credit commensurately, but resulted in only a small increase in household consumption (Figure 2). Total credit limits available at the household-level increased by 20 percent relative to pre-reversal average monthly household consumption, or $1,158. The size of the effect for household credit limit is about the same as that for secondary earners, implying the reversal did not crowd out primary earners’ credit, but expanded the secondary earners’ or stay-at-home spouses’ credit access. Household consumption increased by 3 percent relative to pre-reversal average monthly household consumption, or roughly $170.
  • The TILA reversal did not negatively impact the financial well-being of the household. Over the two-year period following the TILA reversal, a variety of financial solvency outcomes were not materially impacted, including credit card delinquency rates or overdraft probabilities.

 

Figure 2: The 2013 TILA reversal materially increased access to credit and consumption for secondary earners and particularly within single-income households.

Policy Implications: Lessons learned from the 2013 TILA reversal 

  • Underwriting standards and financial policies can have an uneven impact on individual family members in the household.
  • Policies aimed at reducing financial disparities between spouses – such as underwriting standards based on household rather than individual marital assets and income can improve the financial imbalance between spouses and reduce consumption inequality.
  • Efforts to expand access to credit – in this case to secondary earners and stay-at-home spouses within the household – can achieve welfare gains for historically underserved members of the community without necessarily resulting in worse credit outcomes or financial distress for the household. The TILA reversal did just that. 

 






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