Written by: Adam West
Edited by: Lillian Guevara-Castro
When it comes to credit card holder archetypes, two sets of consumer groups exist: revolvers and transactors.
Both are attractive to lenders, but for different reasons. Each cohort has specialized products and services tailored to them, running the spectrum from the infamously limitless American Express Black Card for only the most elite of the big-spending transactors to the exorbitantly priced payday loans for the most desperate of the revolvers.
Transactors will happily pay annual fees for credit cards, either because they like the added heft of a metal credit card in their wallets or because they’ve done the math and discovered that they will receive enough value from the benefits and category-specific rates of return that annual fees are just the cost of doing business.
By the way, I recently learned the hard way to triple-check for stainless steel in your credit card before running it through the shredder. But on the bright side, I have a new paper shredder.
Back to the point, transactors almost never pay interest from month to month. Instead, they pay off their statement balances and merely provide credit card issuers with the merchant-paid transaction fees that’s no skin off their backs.
Credit cards are the most popular form of revolving credit (as opposed to fixed credit, such as an installment loan), which is where we get the term, “revolvers.” These are people who constantly pay interest and never pay off the entire amount they owe each month, rewarding issuers by paying an agreed upon interest rate, which averages nearly 23 percent right now.
My Credit Report Says I’m a Revolver
The behavioral aspects of using credit cards are fascinating to me so it was my pleasure to recently interview Dr. Scott Schuh, a longtime macroeconomicist for the Federal Reserve. I spoke with Schuh, who is now an Associate Professor at West Virginia University’s John Chambers College of Business and Economics, about his recently published paper on the long-term nature of credit card behaviors.
During the course of our conversation, I asked Schuh about the credit bureau data he and his co-author Scott Fulford, a Senior Economist for the Consumer Financial Protection Bureau, used in their research, when he said something that surprised me.
“The credit bureau data does not actually clearly specify who revolves debt and who doesn’t.”
While this isn’t exactly breaking news within the credit industry, it’s something I’d never considered. My credit report is lying about me. I pay off all of my credit card balances in full each month, but my credit report says I’m a revolver! Queue the audible gasp.
According to our credit reports, transactors are about as real as the Easter Bunny or Santa Claus. If at any given moment, you have a balance of more than $0 on any credit card account that you haven’t settled, your credit report says you’re a revolver.
“People who use their credit cards regularly and efficiently by paying them off, they carry debt,” Schuh explained. “It’s just non-interest bearing debt because it’s whatever they spent during the past 31 days. But then there are people who don’t pay it all off, and it builds up, and that distinction is not clear in the reported data through the credit bureaus, and it would be very helpful to have that.”
Honesty is the Best Policy
At face value, this would seem like an issue that might only matter to academic researchers or credit card nerds like myself, but I think there may be more business value here.
Schuh suggested in our conversation that credit bureaus as a policy should “start reporting both the revolving and non-revolving behavior rather than leaving it to be inferred through math and statistics.”
I agree with him, especially because it seems like a correctable gap in the data that could give lenders a more holistic understanding of borrowers and what they may be in the market for.
“The credit bureau data does not actually clearly specify who revolves debt and who doesn’t.” — Scott Schuh, WVU associate professor
Imagine sales teams finding out a long-time transactor has only recently started making minimum payments on a credit card. They would be swooping in with a personal loan or balance-transfer offer so fast it would make your head spin.
Marketing teams for financial services firms are on a never-ending quest to understand their customers, and they work directly with product teams to help them better understand consumer demand.
Knowing whether a borrower regularly carries credit card debt is something they should, and could, know.
