Thursday, June 30, 2011

Credit Card Usage - a Study of Convenience and Revolving Users

I was recently reading an article about John Gottman, who researches marriage relationships, where he said that he can predict divorce in a couple with 90% accuracy ( His research is interesting and valuable for couples getting married and for those seeking to improve their marriage relationships.


In addition to the Gottman article I recently pulled out a 2009 copy of the Journal of Financial Counseling and Planning as I was cleaning up my office. I scanned the Table of Contents and the title of one of the articles intrigued me; Utilizing the Theory of Planned Behavior to Understand Convenience Use of Credit Cards (Rutherford & DeVaney, 1999 – accessible online at In this article the authors try to predict whether people are convenience users of credit cards (pay off the balance each month) or revolvers (carry a balance and therefore pay interest on the balance). While they don’t give a number, such as being able to predict with 90% accuracy, they do present some interesting statistics to measure your own credit card behavior against.


I won’t be touching on all their research in this article, but the entire article is worth reading if you are interested in credit card research.


1.      The authors hypothesize that households with a negative attitude toward credit are more likely to be convenience users of credit cards. There are basically three attitudes toward credit: it’s a good thing, it’s a bad thing, and it can be good or bad. For the record, I see credit as a tool that can be used as a good or bad thing, but I also believe strongly that the faster you pay off all your debt the better off you will be. There are many financial planners that would not agree with me on that, arguing that carrying a mortgage on your home is a good thing (tax deduction, low interest, etc.), but I want the total freedom of not owing any money to anyone. But I digress.

The study that the authors conducted confirmed their hypothesis – those that have a negative attitude toward credit are less likely to carry a balance, and therefore are considered convenience users. The data seemed to be inconclusive for those who see debt as good or bad. I imagine it depends in some way on which direction you lean. As you can probably clearly tell from the above paragraph, I lean towards thinking credit is bad (mostly because of the negative effect I have seen credit usage have in people’s lives), and I certainly think that carrying a credit card balance is not a smart financial thing to do, and therefore I don’t carry a balance, so I am a convenience user of credit cards.

2.      Another hypothesis is that households with longer planning horizons (10 years or more) are more likely to be convenience users of credit cards. This makes sense – if you have a long-term outlook you are more likely to see carrying a balance as taking away from future consumption – whether you are looking at college funding for children or grandchildren or retirement. Spending money on interest now means less money to spend on things you need or want in the future.

The authors cite a number of studies that support the hypothesis, and in their own study they found that those with at least a 5-year financial planning time horizon were likely to be convenience users, but that having a time horizon of less than 5-years did not necessarily make someone a revolving user.

3.      Households that borrow for purchases beyond their basic needs are more likely to be revolving users of credit cards. Again, this makes perfect sense – if you are utilizing credit cards to live beyond your means, by definition you are likely to be carrying a balance. If you make $2000 a month, but spend $2200 and finance that other $200 with a credit card, your balance is going to continue to rise since you don’t have the extra money to pay off your balance. This, by the way, is a strategy that leads people down the road to financial destruction, as does Pay Day lending. You can’t continue to increase your balance, because as your balance increases so does your minimum payment. As your minimum payment goes up you now have to put more things on credit each month. In the example of someone spending $2200, imagine that their minimum payment was $50, which is figured into their $2200, but now their payment is $75, making their monthly needs $2225.

If you are making less than you earn you have three options: increase your income, decrease your spending, or do a combination of the two. Living beyond your means, and financing it with a credit card, is a strategy that will get you further and further behind.

The authors study found that even those who are considered convenience users splurge occasionally and will carry a balance for a time, but overall the research shows that those who leave beyond their means are more likely to be revolving users.

4.      And finally, a note on education. The authors hypothesize that household heads with higher levels of education are more likely to be convenience users of credit cards. Their hypothesis is supported – those with a college education are more likely to be convenience users when compared to those who have a high school education, or even to those who have some college (this may be partially because students tend to use credit cards while in school to pay for books, food, etc. – further research in this area would be interesting to see if these students see themselves as convenience users or revolving users, how soon they plan to pay off their balances, etc).

We have asserted, and will continue to assert, that education is one of the best investments you can make. This study supports our theory again.

I have only taken the space to discuss four of the author’s hypothesis. There are ten total and I would encourage you to read the article if you would like to learn more about this topic.


Correction from 6/24/11 Financial Tip: I stated that Minot was in South Dakota, but Minot is actually in North Dakota.


Ryan H. Law, M.S., AFC

Department of Personal Financial Planning

Office for Financial Success Director

University of Missouri Center on Economic Education Director


239E Stanley Hall

University of Missouri

Columbia, MO 65211


573.882.9211 (office)

573.884.8389 (fax)


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