How Do Individuals Repay Their Debt? The Balance-Matching Heuristic

Gathergood, John; Mahoney, Neale; Stewart, Neil; Weber, Joerg

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, J., Mahoney, N., Stewart, N., & Weber, J. (2019). How Do Individuals Repay Their Debt? The Balance-Matching Heuristic. American Economic Review, 109(3), 844-875. https://doi.org/10.1257/aer.20180288

• Journal Article Type: Article
• Acceptance Date: Aug 14, 2018
• Online Publication Date: Mar 1, 2019
• Publication Date: 2019-03
• Deposit Date: Aug 15, 2018
• Publicly Available Date: Aug 15, 2018
• Journal: American Economic Review
• Print ISSN: 0002-8282
• Publisher: American Economic Association
• Peer Reviewed: Peer Reviewed
• Volume: 109
• Issue: 3
• Pages: 844-875
• DOI: https://doi.org/10.1257/aer.20180288
• Keywords: credit cards, consumer borrowing, rational behavior, balance matching, heuristics
• Public URL: https://nottingham-repository.worktribe.com/output/1032975
• Publisher URL: https://www.aeaweb.org/articles?id=10.1257/aer.20180288&&from=f