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

19 Pages Posted: 27 Feb 2019

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: February 6, 2019

Abstract

In Gathergood et al. (forthcoming), we studied credit card repayments using linked data on multiple cards from the United Kingdom. We showed that individuals did not allocate payments to the higher interest rate card, which would minimize the cost of borrowing, but instead made repayments according to a balance-matching heuristic under which the share of repayments on each card is matched to the share of balances on each card. In this paper, we examine whether these results extend to the United States using a large sample of TransUnion credit bureau data. These data do not provide information on interest rates, so we cannot examine the optimality of payments. However, we observe balances and repayments, so we can examine balance-matching behavior. We replicate our analysis and find that Americans also repay their debt in accordance with a balance-matching heuristic.

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 Americans Repay Their Debt? The Balance-Matching Heuristic (February 6, 2019). Available at SSRN: https://ssrn.com/abstract=3332329 or http://dx.doi.org/10.2139/ssrn.3332329

John Gathergood

University of Nottingham - School of Economics ( email )

Sir Clive Granger Building
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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