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Partially Disaggregated Household-level Debt Service Ratios: Construction and Validation

Currently published data series on the United States household debt service ratio are constructed from aggregate household debt data provided by lenders and estimates of the average interest rate and loan terms of a range of credit products. The approach used to calculate those debt service ratios could be prone to missing changes in loan terms. Better measurement of this important indicator of financial health can help policymakers anticipate and react to crises in household finance. We develop and estimate debt service ratio measures based on individual-level debt payments data obtained from credit bureau data and published estimates of disposable personal income. Our results suggest that aggregate debt service ratios may have understated the payment requirements of households. To the extent possible with two very distinct data sources we examine the details on the composition of household debt service and identify some areas where required payments appear to have varied substantially from the assumptions used in the Board of Governors’ aggregate calculation. We then use our technique to calculate both national and state-level debt ratios and break these debt service ratios into debt categories at the national, state level, and metro level. This approach should allow detailed forecasts of debt service ratios based on anticipated changes to interest rates and incomes, which could serve to evaluate the ability of households to cope with potential economic shocks. The ability to disaggregate these estimates into geographic regions or age groups could help to identify the severity of the effects on more exposed groups.

Suggested citation: Elvery, Joel A., and Mark E. Schweitzer, 2016. “Partially Disaggregated Household-level Debt Service Ratios: Construction and Validation,” Federal Reserve Bank of Cleveland Working Paper, no. 16-23.

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