The credit card debt puzzle: the role of preferences, credit risk, and financial literacy

Olga Gorbachev and Maria Luengo-Prado

No 16-6, Working Papers from Federal Reserve Bank of Boston

Abstract: We use the 1979 National Longitudinal Survey of Youth to revisit what is termed the credit card debt puzzle: why consumers simultaneously co-hold high-interest credit card debt and low-interest assets that could be used to pay down this debt. This dataset contains unique information on intelligence, financial literacy, and preferences, while also providing a complete picture of households? balance sheets. Relative to individuals with no credit card debt but positive liquid assets, individuals in the puzzle group have higher discount rates, slightly lower financial literacy scores, and very different perceptions on future credit risk: many individuals are using credit cards for precautionary motives.

Keywords: household finances; risk aversion; time preferences; precautionary motives; bankruptcy; foreclosures (search for similar items in EconPapers)
JEL-codes: D14 D91 E21 G02 (search for similar items in EconPapers)
Pages: 84 pages
Date: 2016-07-07
New Economics Papers: this item is included in nep-ban, nep-mac and nep-pay
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Citations: View citations in EconPapers (5)

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Working Paper: The Credit Card Debt Puzzle: The Role of Preferences, Credit Risk, and Financial Literacy (2016)
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