Self-Control, Financial Literacy & the Co-Holding Puzzle
29 Pages Posted: 14 Feb 2012 Last revised: 8 May 2017
Date Written: March 1, 2014
We use UK survey data to analyze the puzzling co-existence of high cost revolving consumer credit alongside low yield liquid savings in household balance sheets, which we name the ‘co-holding puzzle’. Approximately 12% of households in our sample co-hold, on average, £3800 of revolving consumer credit on which they incur interest charges, even though they could immediately pay down all this debt using their liquid assets. Co-holders are typically more financially literate, with above average income and education. In most estimates co-holding is also associated with impulsive spending behavior on the part of the household. Our results provide empirical support to theoretical models in which households co-hold as a means of managing self-control problems.
Keywords: Consumer credit; Self-control; Financial literacy
JEL Classification: D03; D10; D12; E21
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