Working Paper: NBER ID: w24161
Authors: John Gathergood; Neale Mahoney; Neil Stewart; Joerg Weber
Abstract: We study how individuals repay their debt using linked data on multiple credit cards. Repayments are not allocated to the higher interest rate card, which would minimize the cost of borrowing. Moreover, the degree of misallocation is invariant to the economic stakes, which is inconsistent with optimization frictions. Instead, we show that repayments are consistent with a balance-matching heuristic under which the share of repayments on each card is matched to the share of balances on each card. Balance matching captures more than half of the predictable variation in repayments and is highly persistent within individuals over time.
Keywords: debt repayment; credit cards; balance matching heuristic
JEL Codes: D12; D14; G02; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Individuals do not optimally allocate their payments across cards (G51) | Significant misallocation of repayments (G51) |
| Significant misallocation of repayments (G51) | Invariant to economic stakes (F69) |
| Invariant to economic stakes (F69) | Individuals do not adjust repayment behavior in response to interest rates or debt amount (G40) |
| Individuals allocate repayments based on the proportion of balances on each card (G51) | Captures more than half of the predictable variation in repayments (G51) |
| Balance matching (F32) | Persistent over time within individuals (D15) |