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

84 Pages Posted: 23 Aug 2016

See all articles by Olga Gorbachev

Olga Gorbachev

University of Delaware - Economics

María José Luengo‐Prado

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: July, 2016

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

JEL Classification: D14, D91, E21, G02

Suggested Citation

Gorbachev, Olga and Luengo-Prado, Maria Jose, The Credit Card Debt Puzzle: The Role of Preferences, Credit Risk, and Financial Literacy (July, 2016). FRB of Boston Working Paper No. 16-6, Available at SSRN: https://ssrn.com/abstract=2826962

Olga Gorbachev (Contact Author)

University of Delaware - Economics ( email )

Newark, DE 19716
United States

Maria Jose Luengo-Prado

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
207
Abstract Views
891
Rank
266,316
PlumX Metrics