Liquidity Constraint Threat and Household Indebtedness

Using individual-level credit card data from a Singapore financial institution, this paper investigates the effectiveness of a consumer financial regulation aiming to reduce household unsecured debt accumulation. A threat of suspending all existing unsecured credit induces the credit card revolvers to reduce their monthly credit card balance by 211 SGD (or 10.2%) more after the policy announcement relative to non-revolvers. A 188 SGD (or 9.9%) decrease in credit card debt makes a major contribution to the credit card balance reduction, and a 20 SGD (or 24%) decrease in credit card spending makes a minor contribution. We document significant adjustments in credit card use during both the announcement and implementation period. Consistent with the probability weighting interpretation, we find significant debt reduction even among revolvers distant from the penalty threshold. The credit card debt response is stronger among revolvers with lower liquidity constraints and those whose existing unsecured credit is more important.