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WASHINGTON – A new study from the Federal Reserve indicates that mainstream card issuers take care to research the households to whom they issue their cards and that credit card debt alone does not threaten the majority of household economies. “Regarding the effect of industry practices on consumer debt and insolvency,” the Fed wrote, “we find that although the percentage of families holding credit cards issued by banks has risen from about 16 percent in 1970 to about 71 percent in 2004, the household debt service burden has increased only modestly in recent years. The data have consistently shown that the vast majority of households repay their revolving debt on time. The data also indicate that delinquency and default experience vary for different segments of the population, but such diversity is to be expected, as lenders have expanded access to credit to a broader population.” During the debate on the most recent bankruptcy reform measure, which mandated the Fed conduct this study, some legislators charged that credit cards and credit card issuing practices have played a significant role in leading many Americans to file for bankruptcy when they otherwise might not have. Contrary to the notion that credit cards help lead to bankruptcy, the Fed study found that there has not been a large increase in the percentage of U.S. households that are carrying a heavy debt load. In fact, the study found that even among lower income households, those which might have a large debt load in some years tended to not carry the same load later. “Moreover, other research has suggested that although the proportion of families with high indebtedness had remained approximately the same, it is not necessarily the same families who remain heavily burdened by debt over time,” the study reported. “A re-interview in 1986 of many respondents interviewed for the 1983 Survey of Consumer Finances found that in the group with the highest debt service burden in 1983, more than 28 percent had no consumer debt at all by 1986, and the payment burden of another 28 percent was less than 10 percent of income.” Instead of pinning bankruptcy on card or card issuing practices, the Fed study suggested that the causes of bankruptcy were a good deal more complicated and probably arose from a combination of the three most popular current theories of why people declare bankruptcy. Those three reasons are the adverse-event theory, which argues that households file for bankruptcy primarily because of job loss, divorce, or other events that adversely affect earnings or nondiscretionary spending; or the strategic bankruptcy theory, which argues that households respond to the financial benefit of filing for bankruptcy; or the spillover theory, which argues that households are more likely to file for bankruptcy if a friend or relative has done so, either because of diminished stigma or because households learn about bankruptcy by word of mouth. The reality is that bankruptcies probably occur for a mix of these reasons. Adverse circumstances can lead folks to consider bankruptcy who might not have considered it before if someone they knew had not done it or if someone had not explained it to them, the study said.

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