Case Study - Consumer Credit Card Debt Analysis in Current

Economic Downturn

Tucker Lane

Pima Community College

30176 BUS277 Analytical Methods in Business

Professor Broneck

07/14/2023
 Case Study - Consumer Credit Card Debt Analysis in Current
Economic Downturn

This report is a comprehensive analysis of the data on annual income, household size, and
annual credit card charges collected from a sample of 50 American consumers. The objective of
this analysis is to better understand how the current economic downturn is affecting the average
consumer's credit card debt.

Descriptive Statistics

Descriptive statistics provide simple summaries about a sample or about the observations
that have been made. These summaries can be either quantitative or visual. They are key to the
initial phase of data analysis, as they provide a more manageable form of a large amount of data.
 From the above, we can see that the average annual income of the sample is around
$43.48K, the average household size is approximately 3.42 people, and the average amount
charged on credit cards annually is approximately $3,964.06. Notably, the amount charged
exhibits a slightly negative skew, indicating that there are a few consumers with low credit card
charges that slightly skew the distribution.
We can also see that the standard deviation in income is relatively high ($14.55K),
indicating a substantial variation in income among the sampled consumers. This is also reflected
in the income range of $46K.
Another point worth noting is that the distribution of household size leans moderately to
the right (skewness = 0.53), suggesting that larger households (more than the median of 3) are
not uncommon in the sample.
Further sections of this report will dive into the relationship between these variables,
predict credit card charges based on income and household size, and explore the possibility of
adding more variables to the model for a more comprehensive analysis.

Simple Regression Analysis:

First, we develop two simple regression models using annual income and household size
as independent variables respectively.

Model 1: Annual Income as the Independent Variable

 In this model, we're using annual income to predict annual credit card charges. The model
summary is as follows:

● The coefficient of determination (R Square) is 0.398, which means that approximately

39.8% of the variation in annual credit card charges can be explained by annual income.
This suggests a moderate level of prediction accuracy.

● The regression equation is Annual Credit Card Charges ($) = 2204 + 40.48 * Annual
Income ($1000s). This implies that for every additional $1000 in income, we can expect
credit card charges to increase by approximately $40.48, holding other factors constant.
 ● The p-value is significantly less than 0.05, which suggests that annual income is a
statistically significant predictor of annual credit card charges.

● There is a positive relationship between annual income and credit card charge. This
implies that as the annual income of a household increases, the amount charged on credit
cards also increases. This might be due to higher-income households having more
disposable income to spend.

Model 2: Household Size as the Independent Variable

In this model, we're using household size to predict annual credit card charges. The
model summary is as follows:
 ● The coefficient of determination (R Square) is 0.567, which means that approximately
56.7% of the variation in annual credit card charges can be explained by household size.
This suggests a higher level of prediction accuracy compared to the first model.

● The regression equation is Annual Credit Card Charges ($) = 2582 + 404.13 * Household
Size. This implies that for every additional member in the household, we can expect
credit card charges to increase by approximately $404.13, holding other factors constant.

● The p-value is significantly less than 0.05, which suggests that household size is a
statistically significant predictor of annual credit card charges.

● There is also a positive relationship between household size and credit card charge. This
suggests that larger households tend to have higher credit card charges, likely because
they have more needs and expenses.

From these results, we can see that while both annual income and household size
significantly influence annual credit card charges, household size appears to be a better predictor,
as indicated by the higher R Square value. Therefore, although income does contribute to the
model, the number of individuals in a household is likely to have a more substantial effect on the
total annual credit card charges.

Multiple Regression Analysis:

 In this model, we're using both annual income and household size as independent
variables to predict annual credit card charges. The model summary is as follows:

● The coefficient of determination (R Square) is 0.826, which means that approximately

82.6% of the variation in annual credit card charges can be explained by the combination
of annual income and household size. This shows a high level of prediction accuracy and
an improvement over the simple regression models.

● The regression equation is Annual Credit Card Charges ($) = 1305 + 33.13 * Annual
Income ($1000s) + 356.3 * Household Size. This implies:

● For every additional $1000 in income, we can expect credit card charges to increase by
approximately $33.13, holding household size constant.

● For every additional member in the household, we can expect credit card charges to
increase by approximately $356.3, holding income constant.

● The p-value for both predictors is significantly less than 0.05, which suggests that both
annual income and household size are statistically significant predictors of annual credit
card charges.

The multiple regression analysis provides a more comprehensive model of the factors that
influence annual credit card charges. While both annual income and household size significantly
impact annual credit card charges, the combined effect of these two factors provides a more
accurate prediction. Moreover, although the impact of an additional $1000 in income is lower in
the multiple regression model ($33.13) compared to the simple regression model ($40.48), the
influence of an additional household member is less reduced ($356.3 versus $404.13 in the
simple model). This suggests that income's impact may be partly accounted for by household
size in the combined model. However, both factors remain significant and should be considered
when predicting annual credit card charges.

Predicted Annual Credit Card Charge:

Using the multiple regression equation we can predict the annual credit card charge for a
three-person household with an annual income of $40,000 as follows:

Annual Credit Card Charges ($) = 1305 + 33.13 * 40 + 356.3 * 3 = $4263.7

Additional Independent Variables:

While the multiple regression model using annual income and household size provides valuable
insight, it's important to note that consumer behavior, such as credit card usage, is influenced by
a variety of other factors. Adding these variables could potentially improve the model's
predictive accuracy.

● Credit Score: A person's credit score could influence their credit card usage, as higher
credit scores often come with increased credit limits and better terms.
● Age: Age can be an essential factor, as different age groups may have different spending
and saving habits.
● Education Level: Education could also play a role in how a consumer uses credit cards, as
financial literacy can influence how a person manages their finances.
● Employment Status: Being employed or unemployed can drastically change a person's
spending habits.
● Financial Responsibility: The number of people in a household that the income is
responsible for can be another critical factor.

Summary of the Average Consumer Debt of the American Family:

The analysis of American consumers' credit card charges against annual income and
household size provides significant insights into consumer behavior during the current economic
downturn. Our multiple regression model accounted for around 82.6% of the variability in
annual credit card charges, indicating a high degree of accuracy in our predictions. On average,
an American family with an annual income of $43,480 and a household size of 3.42 charges
$3964.06 to their credit cards each year. For a three-person household with an annual income of
$40,000, we can predict an annual credit card charge of approximately $4263.7.
The positive relationship between both annual income and household size with credit
card charges suggests that as income increases or households grow larger, credit card usage also
tends to rise. This pattern could be attributed to higher disposable income or greater expenses in
larger households.
It's essential to note that while our model was effective, it could be further refined by
incorporating other potential influencers of credit card usage such as credit score, age, education
level, employment status, and financial responsibility. Inclusion of these factors could help
develop a more nuanced understanding of consumer credit card usage and provide more accurate
predictions.
Understanding these trends is crucial for both consumers and credit card companies.
Consumers can gain insights into their spending habits and make more informed financial
decisions. Simultaneously, credit card companies can better understand consumer behavior,
which can inform their marketing strategies, risk assessment, and customer service approaches.
 This analysis provides a valuable starting point for understanding consumer credit card
debt. Further research and more complex models could yield even more insightful results,
helping stakeholders navigate the financial landscape in these challenging times.