Credit card debt puzzle: liquid assets to pay household bills

Using transaction data from a US consumer payments diary, we revisit the credit card debt puzzle—a scenario in which households revolve credit card debt while also keeping liquid assets as bank account deposits. This scenario is very common: 42 percent of consumers in our sample were borrower-savers in 2019. We explain the puzzle by showing that consumers need their liquid assets to pay household bills and other necessary expenses, including mortgage or rent. More than 80 percent of bills by value were paid out of bank accounts and could not be charged to credit cards, so bank account balances were needed to cover those basic expenses. On average, borrower-savers’ credit card debt exceeded their liquid assets. The average borrower-saver carried almost $6,400 in unpaid credit card debt and had $5,400 in liquid assets. On average, the value of their liquid assets could cover only about 60 percent of their unpaid debt plus monthly bills. In almost every category of assets or debts, borrower-savers were worse off financially than savers. Thus, the differences between borrower-savers and savers are much broader than just their credit card debt and bank account balances; they extend to mortgage debt and home equity. Carrying a mortgage or other debt (such as auto or educational loans) is associated with a higher probability of revolving on a credit card, suggesting that various types of household debt might be complements rather than substitutes. We do not find evidence that either financial literacy scores or the “Big 5” personality traits predict whether a consumer is a borrower-saver. During the COVID-19 pandemic in 2020, bor-savs’ behavior was consistent with what we would expect under our explanation for the credit card puzzle. However, consumers’ unpaid credit card debt decreased, and their liquid assets increased, so the fraction of borrower-savers dropped to 35 percent of the sample.