The Credit Card Debt Puzzle: The Role of Preferences, Credit Risk, and Financial Literacy

Olga Gorbachev and María José Luengo-Prado ()
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María José Luengo-Prado: Boston Federal Reserve

No 16-06, Working Papers from University of Delaware, Department of Economics

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. Relative to individuals with no credit card debt but positive liquid assets (savers), borrower-savers 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. Moreover, changing perceptions about credit risk are essential for predicting transitions among the two groups. Respondents whose credit risk increases over time are more likely to transition from being savers to being borrower-savers, and vice versa. Preferences and the composition of financial portfolios also play a role in these transitions. Importantly, we find that financial literacy may help mitigate the effect of preferences.

Keywords: household finance; risk aversion; time preferences; precautionary motives; bankruptcy; foreclosure (search for similar items in EconPapers)
JEL-codes: D14 D91 E21 G02 (search for similar items in EconPapers)
Pages: 90 pages
Date: 2016
New Economics Papers: this item is included in nep-ban and nep-pay
References: View references in EconPapers View complete reference list from CitEc
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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