How Do Individuals Repay Their Debt? The Balance-Matching Heuristic
64 Pages Posted: 18 Jul 2017 Last revised: 4 Mar 2018
Date Written: February 25, 2018
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 allocate repayments using a balance-matching heuristic under 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.
Keywords: Credit Cards, Consumer Borrowing, Rational Behavior, Balance Matching, Heuristics
JEL Classification: D12, D14, G02, G20
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