Credit cards, credit utilization, and consumption

We use credit bureau data to show that credit card limits grow rapidly early in life and are an important early-life liquidity source. Yet individual credit utilization is stable over the short and long term. To explain these new findings, we propose a life-cycle consumption model with heterogeneous preferences, the option to revolve, and credit cards used for payments. Using diary data to identify payment use and the revealed preference that some people with credit cards borrow at high interest, while others do not to help identify heterogeneous preferences, the estimated model matches consumption and credit use at every frequency. The model suggests that around half the population has an endogenously high marginal propensity to consume. This targetable population explains the large consumption response to unexpected cash.