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

54 Pages Posted: 18 Jul 2017 Last revised: 16 Sep 2017

John Gathergood

University of Nottingham - School of Economics

Neale Mahoney

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Neil Stewart

University of Warwick

Joerg Weber

University of Nottingham - School of Economics; University of Nottingham - Centre for Decision Research and Experimental Economics

Date Written: September 14, 2017

Abstract

We study how individuals repay their debt using linked data on multiple credit cards from five major issuers. We find that individuals do not allocate repayments to the higher interest rate card, which would minimize the cost of borrowing. Instead, individuals seem to allocate repayments using a balancing-matching heuristic by which the share of repayments on each card is matched to the share of balances on each card. We show that balance matching captures more than half of the predictable variation in repayments, performs substantially better than other models, and is highly persistent within individuals over time. Consistent with these findings, we show that machine learning algorithms attribute the greatest variable importance to balances and the least variable importance to interest rates in predicting repayment behavior.

Keywords: Credit Cards, Consumer Borrowing, Rational Behavior, Balance Matching, Heuristics

JEL Classification: D12, D14, G02, G20

Suggested Citation

Gathergood, John and Mahoney, Neale and Stewart, Neil and Weber, Joerg, How Do Individuals Repay Their Debt? The Balance-Matching Heuristic (September 14, 2017). Available at SSRN: https://ssrn.com/abstract=3000526

John Gathergood

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

HOME PAGE: http://https://sites.google.com/site/gathergoodjohn/

Neale Mahoney (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Ave
Chicago, IL 60637
United States
773.702.9278 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Neil Stewart

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

HOME PAGE: http://www.stewart.warwick.ac.uk

Joerg Weber

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 (0)115 95 15870 (Phone)

University of Nottingham - Centre for Decision Research and Experimental Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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