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

Abstract

These numbers are even higher in the US market. Using a representative sample of 2015 TransUnion data, we calculate that 71.5 percent of credit card holders have 2 or more cards, and individuals with 2 or more cards account for 91.8 percent of balances and 91.7 percent of revolving balances.

The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels, Not Sofas

“…We also test whether our results are robust to controlling for balances due on other cards held by the individual at the same time. Drawing from the same universe of data, Gathergood et al (2019) show that consumers tend adopt a repayment heuristic when making intratemporal choices over allocating payments across cards due within the same month. Instead of paying down the highest interest rate debt first, as economic logic would predict, consumers tend to split the ratio of repayments across their cards in approximate proportion to the ratio of revolving balances, which Gathergood et al (2019) describe as the application of a "balance-matching heuristic.…”

“…We draw the subsample of observations from our main sample in which individuals hold two or more cards concurrently within the same month with positive balances due. 7 The resulting sample differs from that used in Gathergood et al (2019), who design their analysis to focus on partial repayment of revolving debts, restricted to cases in which consumer face interest payments, in contrast to our focus on full repayment. 8 We first replicate our main models on this sample (without adding controls for additional cards), for completeness including socioeconomic controls in the regression specification.…”

“…Therefore, we necessarily restrict our sample by more than if we had data on all cards in the United Kingdom. 8 Specifically, Gathergood et al (2019) restrict their sample to observations in which individuals, holding fixed total monthly repayments, have scope to reallocate payments across cards to minimize interest charges. They restrict the sample to months in which the individual (i) carries revolving debt on all cards, (ii) faces different interest rates on the cards, (iii) pays at least the minimum balance due on all cards, and (iv) does not pay all cards down in full.…”

“…Stewart (2009) [see also Navarro-Martinez et al 2011 and Keys and Wang 2016] examined, using both credit card repayment data and an experiment, whether consumers anchor repayments on minimum payment amounts that are currently included on all credit card statements. Gathergood et al (2019) [see also Zinman 2015 andPonce et al 2017] examine how consumers split repayments across debts held over multiple cards. All three contributions show that consumers tend not to minimize interest costs when allocating repayments across cards, and Gathergood et al (2019) show that this arises because consumers tend to split the ratio of repayments across their cards in approximate proportion to the ratio of revolving balances instead of paying down the highest interest rate debt first as economic logic would predict.…”

“…Gathergood et al (2019) [see also Zinman 2015 andPonce et al 2017] examine how consumers split repayments across debts held over multiple cards. All three contributions show that consumers tend not to minimize interest costs when allocating repayments across cards, and Gathergood et al (2019) show that this arises because consumers tend to split the ratio of repayments across their cards in approximate proportion to the ratio of revolving balances instead of paying down the highest interest rate debt first as economic logic would predict. Using detailed transaction data from a relatively affluent and financially sophisticated online panel of 917 households, Stango and Zinman (2009) found that the median household pays $500 per year in credit card costs and could avoid more than half these costs with minor changes in behavior.…”