Sticking to Your Plan: The Role of Present Bias for Credit Card Paydown

Kuchler, Theresa; Pagel, Michaela

doi:10.3386/w24881

Cited by 38 publications

(25 citation statements)

References 40 publications

(47 reference statements)

Supporting

Mentioning

Contrasting

Order By: Relevance

“…For the subsample of credit card debt holders, our results complement the studies of Tan et al (), Telyukova (), and Kuchler (), which focus on individuals with credit card balances. We find that, even in this subsample, most of the time, households are aware of their credit card debt and its costs.…”

supporting

confidence: 81%

Credit Cards: Transactional Convenience or Debt‐Trap?

2018

View full text Add to dashboard Cite

We survey individuals on their credit card usage. Contrary to popular press, most credit card holders use credit cards in a responsible manner. They tend to use credit cards for transaction convenience and pay little interest. Only a minor subset of people uses credit cards to access expensive credit, with only 7% of credit card holders in our sample never paying the balance in full. Credit card debt is more common among older, less financially literate, and less trusting respondents. Even individuals with credit card debt are well aware about its costs and are likely to make informed financial choices.Household debt remains one of the most under-researched areas in finance. However, the economic significance of household debt is very high. For example, in the US, in the fourth quarter of 2016, the ratio of household debt to the gross domestic product was 80.1%. 1 At the same time, 42.4% of households in the euro area of the European Union was indebted with a median outstanding amount of debt (conditional on holding debt) of €28,200. 2 Zinman (2015)

show abstract

supporting

confidence: 81%

Credit Cards: Transactional Convenience or Debt‐Trap?

2018

View full text Add to dashboard Cite

show abstract

“…We follow Gelman et al (2014), Baker (2013), Kuchler (2015), and Kueng (2015) in using data from a financial aggregation and service application (app), which overcomes the accuracy, scope, and frequency limitations of the existing data sources of consumption and income. Gelman et al (2014) were the first to advance the measurement of income and spending with this high-frequency app data, which is derived from the actual transactions and account balances of individuals.…”

Section: Literature Review and Theoretical Backgroundmentioning

confidence: 99%

The Liquid Hand-to-Mouth: Evidence from Personal Finance Management Software

Olafsson

Pagel

2018

The Review of Financial Studies

Self Cite

178

View full text Add to dashboard Cite

We use a very accurate panel of all individual spending, income, balances, and credit limits from a financial aggregation app, and we document significant spending responses to the arrival of both regular and irregular income. These payday responses are clean, robust, and homogeneous for all income and spending categories throughout the income distribution. Spending responses to income are typically explained by households' capital structures. Households that hold little or no liquid wealth have to consume hand-to-mouth. However, we find that few individuals hold little or no liquidity, and we report that liquidity holdings are much larger than predicted by state-of-the-art models that explain spending responses with liquidity constraints due to illiquid savings. Given that present liquidity constraints do not bind, we analyze whether individuals hold liquidity cushions to cope with future liquidity constraints. To that end, we analyze cash-holding responses to income payments inspired by the corporate finance literature. However, we find that individuals' cash responses are consistent with standard models without illiquid savings, and neither present nor future liquidity constraints being frequently binding. Because these models are inconsistent with payday responses, we feel that the evidence therefore suggest the existence of "liquid hand-to-mouth" households that spend heuristically.

show abstract

“…This tension has been explained with buffer stock models augmented with an additional assumption: either discounting with present bias 10 ( Laibson et al, 2003Laibson et al, , 2017 or illiquid assets with very high rates of return and credit cards with counterfactually low interest rates . Present bias has also been used to explain willingness to hold high-interest debt (Ausubel, 1991), suboptimal debt-repayment trajectories (Kuchler and Pagel, 2017), and heterogeneity in debt levels. Individuals who exhibit present bias in laboratory tasks are 15 percentage points more likely to have credit card debt, and conditional on borrowing, have about 25 percent more debt (Meier and Sprenger, 2010).…”

Section: Credit Cardsmentioning

confidence: 99%

Behavioral Household Finance

Beshears

Choi

Laibson

et al. 2018

View full text Add to dashboard Cite

This chapter provides an overview of household finance. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: consumption and savings, borrowing, payments, asset allocation, and insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: education and information, peer effects and social influence, product design, advice and disclosure, choice architecture, and interventions that directly target prices or quantities. This chapter is divided into two parts, each of which is further divided into several sections. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing both extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: (I) consumption and savings, (II) borrowing, (III) payments, (IV) asset allocation, and (V) insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: (VI) education and information, (VII) peer effects and social influence, (VIII) product design, (IX) advice and disclosure, (X) choice architecture, and (XI) interventions that directly target prices or quantities. The final section of the paper (XII) concludes. John BeshearsWe offer broad coverage of the household finance literature, but we limit the scope of our discussion along some dimensions. We focus on the U.S. institutional context and on empirical work based on U.S. data, although we do bring evidence from other wealthy countries to bear when germane and occasionally reference evidence from developing countries. We address household asset allocation but do not draw out its implications for asset pricing, which are covered by the asset pricing chapter in this handbook. Although household decisions regarding health care are relevant to household finance, we largely omit this literature from our chapter because it is covered in depth in the chapter on behavioral health economics. Finally, there is some overlap between our section on financial product design and the chapter on behavioral industrial organization; we refer readers to that chapter for related material on that topic. Part 1: Facts I. Consumption and SavingsBeginning with the seminal work of Modigliani and Brumberg (1954) and Friedman (1957), economists have embraced the view that households choose to save and borrow to smooth consumption over the lifecycle. Intuitively, if agents have concave utility functions over consumption, then they should spread consumption across time to optimally...

show abstract

Sticking to Your Plan: The Role of Present Bias for Credit Card Paydown

Cited by 38 publications

References 40 publications

Credit Cards: Transactional Convenience or Debt‐Trap?

Credit Cards: Transactional Convenience or Debt‐Trap?

The Liquid Hand-to-Mouth: Evidence from Personal Finance Management Software

Behavioral Household Finance

Contact Info

Product

Resources

About