How Do Individuals Repay Their Debt? The Balance-Matching Heuristic
- (pp. 844-75)
(Complimentary)
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.Citation
Gathergood, John, Neale Mahoney, Neil Stewart, and Jörg Weber. 2019. "How Do Individuals Repay Their Debt? The Balance-Matching Heuristic." American Economic Review, 109 (3): 844-75. DOI: 10.1257/aer.20180288Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets