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

Author

Listed:
  • John Gathergood
  • Neale Mahoney
  • Neil Stewart
  • Jörg Weber

Abstract

In Gathergood et al. (2019), 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 have 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.

Suggested Citation

  • John Gathergood & Neale Mahoney & Neil Stewart & Jörg Weber, 2019. "How Do Americans Repay Their Debt? The Balance-Matching Heuristic," NBER Working Papers 25557, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25557
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    References listed on IDEAS

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    1. John Gathergood & Neale Mahoney & Neil Stewart & Jörg Weber, 2019. "How Do Individuals Repay Their Debt? The Balance-Matching Heuristic," American Economic Review, American Economic Association, vol. 109(3), pages 844-875, March.
    2. Alejandro Ponce & Enrique Seira & Guillermo Zamarripa, 2017. "Borrowing on the Wrong Credit Card? Evidence from Mexico," American Economic Review, American Economic Association, vol. 107(4), pages 1335-1361, April.
    3. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
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    Cited by:

    1. Achten, Sandra & Lessmann, Christian, 2020. "Spatial inequality, geography and economic activity," World Development, Elsevier, vol. 136(C).
    2. Sandra Achten & Christian Lessmann, 2019. "Spatial inequality, geography and economic activity," CESifo Working Paper Series 7547, CESifo.
    3. Paul D. Adams & Stefan Hunt & Christopher Palmer & Redis Zaliauskas, 2019. "Testing the Effectiveness of Consumer Financial Disclosure: Experimental Evidence from Savings Accounts," NBER Working Papers 25718, National Bureau of Economic Research, Inc.
    4. J. Anthony Cookson & Erik P. Gilje & Rawley Z. Heimer, 2020. "Shale Shocked: Cash Windfalls and Household Debt Repayment," NBER Working Papers 27782, National Bureau of Economic Research, Inc.
    5. Johannes G. Jaspersen & Marc A. Ragin & Justin R. Sydnor, 2019. "Predicting Insurance Demand from Risk Attitudes," NBER Working Papers 26508, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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