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

John Gathergood, Neale Mahoney, Neil Stewart and Jörg Weber ()

No 24161, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D12 D14 G02 G20 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-big and nep-pay
Note: CF IO LS PE
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Citations: View citations in EconPapers (3)

Published as John Gathergood & Neale Mahoney & Neil Stewart & Jörg Weber, 2019. "How Do Individuals Repay Their Debt? The Balance-Matching Heuristic," American Economic Review, vol 109(3), pages 844-875.

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Journal Article: How Do Individuals Repay Their Debt? The Balance-Matching Heuristic (2019)
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