Keeping consumers in the red: Hedonic debt prioritization within multiple debt accounts

Abstract

In our paper we contribute to the burgeoning literature in the psychology of debt repayment. Across three experiments, we explore the effects of the type (hedonic or utilitarian) and the timing of debt on consumers' debt repayment when managing multiple debt accounts. While prior literature has demonstrated that debtors who own multiple credit cards behave irrationally by paying down smaller balances rather than balances with higher interest rates, we found that debts incurred for hedonic purchases and in the distant past (versus proximal past) amplify this effect. The anticipated impact of debt repayment on consumption enjoyment is found to mediate this effect.

Debt and Overindebtedness: Psychological Evidence and its Policy Implications

“…The debt‐elimination strategies that debtors tend to prefer include repaying first the creditor with whom they perceive themselves to have a closer relationship (Polletta & Tufail, 2014), and reducing the overall number of their debts by paying off small debts completely rather than paying something off larger debts bearing higher interest (Amar et al., 2011; Besharat et al., 2014; Kettle et al., 2016), especially when spouses take decisions jointly (Olson & Rick, 2014). The preference for reducing the number of debts has attracted much comment, because logically it is not the quickest way to become debt free, which would always be to start with the debt bearing the highest interest (Besharat et al., 2014).…”

The Round‐Number Advantage in Consumer Debt Payoff

“…One might assume that the likelihood of debt repayment would chiefly depend on factors such as the size of the debt, the amount of interest that is accruing, and whether or not the consumer has sufficient funds available to pay the debt. However, debt repayment researchers have focused over the past decade on identifying non‐normative strategies employed by consumers when managing multiple debt accounts (e.g., Besharat et al., 2014, 2015; Kettle et al., 2016). For example, rather than first paying down debts with higher interest rates, people have been shown to irrationally pay off smaller debts that have lower interest rates (Amar et al., 2011; Gal & McShane, 2012; Gathergood et al, 2019).…”

Actitudes hacia el endeudamiento hedónico en estudiantes secundarios chilenos

“…Respecto a la postura hedónica frente al endeudamiento, algunos estudios muestran que los individuos endeudados en compras de placer tienden a dar preferencia a estas en el momento de pagar para estar en capacidad de seguir accediendo a estos bienes (Besharat et al, 2015), de forma que se produce una adaptación hedónica que fomenta el gasto excesivo y el endeudamiento. En esta misma línea, otros estudios con adolescentes han mostrado una correlación positiva entre hedonismo y materialismo (Barros et al, 2019).…”