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

80 Pages Posted: 18 Jul 2017 Last revised: 15 Aug 2018

See all articles by John Gathergood

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

Warwick Business School, University of Warwick

Joerg Weber

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2018

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.

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 (August 14, 2018). Becker Friedman Institute for Research in Economics Working Paper No. 2018-7. Available at SSRN: https://ssrn.com/abstract=3000526 or http://dx.doi.org/10.2139/ssrn.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

Warwick Business School, University of Warwick ( email )

Gibbet Hill Road
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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