As economists have tried to understand the causes of the Great Recession and its consequences for households and firms, a consensus has emerged: The severity of the recession was amplified by the rapid buildup in consumer credit leading up to it and the subsequent credit retrenchment. However, the credit cycle played out unevenly among individuals of different financial means and across different parts of the U.S. Thus, one potential key to understanding the Great Recession is documenting how credit trends varied across the distribution of income and across geography, as well as across the two measures jointly.
In this Chicago Fed Letter, we present information on credit growth rates at the zip code level for different types of consumer debt (mortgages, student loans, and other credit). We show how the level and composition of debt changed during the credit run-up period (2001:Q4 - 2008:Q3) and also during the credit retrenchment period (2008:Q3 - 2012:Q4). To better understand whose credit use changed over time, we show how the credit cycle played out across income classes by grouping zip codes by their decile rank in the national income distribution. In addition, to understand where credit use changed over time, we show how the credit cycle played out across states. We then cross-tabulate both measures, which allows us to show the connection between credit growth during the credit cycle's boom years and the subsequent credit retrenchment across the income distribution in different parts of the nation. This exercise may be particularly relevant to those interested in understanding the impact of the Great Recession on low-income families.
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