How Do Individuals Repay Their Debt? The Balance-Matching Heuristic
John Gathergood, Neale Mahoney, Neil Stewart, Jörg Weber
American Economic Review · 2019 · Volume 109 · Issue 3
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
Household Saving, Personal Finance, Intertemporal Household Choice, Life Cycle Models and Saving, Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, Behavioral Finance: Role and Effects of Psychological, and Cognitive Factors on Decision Making in Financial Markets
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