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

81 Pages Posted: 3 Jan 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 Exeter Business School - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2017

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.

Suggested Citation

Gathergood, John and Mahoney, Neale and Stewart, Neil and Weber, Joerg, How Do Individuals Repay Their Debt? The Balance-Matching Heuristic (December 2017). NBER Working Paper No. w24161, Available at SSRN: https://ssrn.com/abstract=3095122

John Gathergood (Contact Author)

University of Nottingham - School of Economics ( email )

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

Neale Mahoney

University of Chicago Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Neil Stewart

Warwick Business School, University of Warwick ( email )

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

Joerg Weber

University of Exeter Business School - Department of Economics ( email )

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Exeter, EX4 4RJ
United Kingdom

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