Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data

Household Need for Liquidity and the Credit Card Debt Puzzle

Abstract. In the 2001 U.S. Survey of Consumer Finances, 27% of households report simultaneously revolving significant credit card debt and holding sizeable

Timing to the Statement: Understanding Fluctuations in Consumer Credit Use

We show that consumers spend 15% more per day in the first week following the receipt of a credit card statement than in the days just prior to the statement. This increase in spending includes both an increase in the likelihood that they use the credit card in the first weeks following their statement and an increase in transaction amount on days they use the credit card. In contrast to the effect on credit card spending, debit card spending is unaffected by credit card statement issuance, suggesting that consumers are not simply switching among modes of payment. Our estimates are based on exogenous variation from bank-assigned statement dates. We propose and test several alternative explanations to this spending puzzle: optimization of the free float, salience effect of the credit card statement, mental accounting, liquidity constraints, and automatic payments. We find that the consumers most apt to spend early in the credit card cycle tend to be those who do not revolve balances and are not close to their credit limit. Thus, this paper documents a puzzle with mixed support for several alternative explanations. This paper was accepted by David Simchi-Levi, finance.

Consumer Rationality and Credit Cards

Borrowing on credit cards at high interest rates might appear irrational. However, even low transactions costs can make credit cards attractive relative to bank loans. Credit cards also provide liquidity services by allowing consumers to avoid some of the opportunity costs of holding money. The effect of alternative interest rates on the demand for card debits can explain why credit card interest rates only partially reflect changes in the cost of funds. Credit card interest rates that are inflexible relative to the cost of funds are not inconsistent with a competitive equilibrium that yields zero profits for the marginal entrant.

The Co-Holding Puzzle: New Evidence from Transaction-Level Data

The tendency of consumers to hold low-yield liquid savings while simultaneously holding high-cost unsecured credit on revolving credit lines is a long standing

Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay

In studies involving genuine transactions of potentially high value we show that willingness-to-pay can be increased when customers are instructed to use a credit card rather than cash. The effect may be large (up to 100%) and it appears unlikely that it arises due solely to liquidity constraints. In addition to demonstrating the effect, we provide a methodology for detecting it, and our findings suggest a source of variance to test alternative explanations.

Consumption Response to Credit Expansions: Evidence from Experimental Assignment of 45,307 Credit Lines

In a field experiment that constructs a randomized credit limit shock, participants borrow to spend 11 cents on the dollar in the first quarter and 28 cents by the third year. Effects extend to those far from the limit, those who had the new limits as available credit, and those with a liquid asset buffer. In the short-run, flexible and installment contracts are used in tandem, with unconstrained using installments more. Long-run borrowing is predominantly using installments. Near limits, participants borrow when credit expands but save out of constraints when limits are tight. Findings support a buffer-stock interpretation emphasizing precautionary saving.

How Do Consumers Avoid Penalty Fees? Evidence from Credit Cards

Using data from multiple card issuers, we show that the most common penalty fee type incurred by credit card holders, late payment fees, declines sharply over the first few months of card life. This phenomenon is wholly due to some consumers adopting automatic payments after a late payment event, thereby insuring themselves against future late payment fees. Nonadopters, who remain on manual-only payments, experience an unchanged high likelihood of future fees, despite exhibiting ample levels of available liquidity. Our results show that heterogeneity in adopting account management features of financial products, such as automatic payments, is important for understanding who avoids financial mistakes. This paper was accepted by Gustavo Manso, finance.

Overconfidence and the Credit Card Debt Puzzle

This article investigates the credit card debt puzzle. Simultaneously holding credit card debt and liquid assets is puzzling given the sizeable difference between interest rates of debt and assets. However, this behavior is common—about 31% of households in the 2016 Survey of Consumer Finances. The cost of co-holding may be justified if consumers anticipate future restrictions in credit or if they need to maintain liquidity. Other existing explanations for co-holding include impulsive spending and low financial literacy. This research reveals a new explanation for the credit card debt puzzle: consumers’ overconfidence of their financial knowledge. Using a Coarsened Exact Matching method, we found that overconfident consumers were 20%–40% more likely to co-hold credit card debt and liquid assets.

Do Payment Mechanisms Change the Way Consumers Perceive Products?

Abstract. Do payment mechanisms change the way consumers perceive products? We argue that consumers for whom credit cards (cash) have been primed focus mor

Minimum Payments Alter Debt Repayment Strategies Across Multiple Cards

U.S. households currently hold $770 billion in credit card debt, often managing repayments across multiple accounts. The authors investigate how minimum payment requirements (i.e., the requirement to allocate at least some money to each account with a balance) alter consumers’ allocation strategies across multiple accounts. Across four experiments, they find that minimum payment requirements cause consumers to increase dispersion (i.e., spread their repayments more evenly) across accounts. The authors term this change in strategy “the dispersion effect of minimum payments” and provide evidence that it can be costly for consumers. They find that the effect is partially driven by the tendency for consumers to interpret minimum payment requirements as recommendations to pay more than the minimum amount. While the presence of the minimum payment requirement is unlikely to change, the authors propose that marketers and policy makers can influence the effects of minimum payments on dispersion by altering the way that information is displayed to consumers. Specifically, they investigate five distinct information displays and find that choice of display can either exaggerate or minimize dispersion and corresponding costs. They discuss implications for consumers, policy makers, and firms, with a particular focus on ways to improve consumer financial well-being.

The Credit Card Debt Puzzle: The Role of Preferences, Credit Access Risk, and Financial Literacy

Abstract. We use the 1979 National Longitudinal Survey of Youth to revisit what is termed the credit card debt puzzle: why consumers simultaneously co-hold high-interest credit card debt and low-interest assets that could be used to pay down this debt. Relative to individuals with no credit card debt but positive liquid assets, borrower-savers have very different perceptions of future credit access risk and use credit cards for precautionary motives. Moreover, changing perceptions about credit access risk are essential for predicting transitions among the two groups. Preferences and the composition of financial portfolios also play a role in these transitions.

Cash versus Debit Card: The Role of Budget Control

Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for financial decision making within a household find cash and the debit card equally helpful for monitoring their household finances. Individuals differ in major respects, however. In particular, low earners and the liquidity‐constrained prefer cash as a budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behavior. These findings suggest that the substitution of cash by cards may slow down because of the financial crisis.

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.

Managing Mental Accounts: Payment Cards and Consumption Expenditures

Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously received a new credit card, without requesting one. Using random variation in the time of receipt we show that individuals temporarily increase total consumption expenditure by making purchases with the new card without reducing spending on the others. We do not observe a corresponding increase in indebtedness. Total consumption expenditure rises even for the least liquidity-constrained individuals. The evidence is consistent with consumers treating methods of payment as nonfungible budget categories, as suggested by models of mental accounting and narrow bracketing.

Minimum Required Payment and Supplemental Information Disclosure Effects on Consumer Debt Repayment Decisions

Repayment decisions—how much of the loan to repay and when to make the payments—directly influence consumer debt levels. The authors examine how minimum required payment policy and loan information disclosed to consumers influence repayment decisions. They find that while presenting minimum required payment information has a negative impact on repayment decisions, increasing the minimum required level has a positive effect on repayment for most consumers. Experimental evidence from U.S. consumers shows that consumers’ propensity to pay the minimum required each month moderates these effects; U.K. credit card field data indicate that borrowers’ credit limit and balance due also moderate these effects. However, increasing the minimum level is unlikely to completely eliminate the negative effect of presenting minimum payment information. In addition, disclosing supplemental information, such as future interest cost and time needed to repay the loan, does not reduce the negative effects of including minimum payment information and has no substantial positive effect on repayments. This research offers new insights into the debt repayment process and has implications for consumers, lenders, and public policy.

Disclosing the costs of co-holding liquid assets and high-interest debt has limited impact on behavior

Abstract Why do consumers simultaneously maintain low-yield liquid assets and high-interest revolving debt? This behavior, known as ``co-holding,'' affects 23\% of credit card users in our sample from a major international bank and costs the typical co-holder hundreds of dollars annually in unnecessary interest charges. Our analysis of 38 months of detailed banking records reveals that co-holding is remarkably persistent, with typical co-holders maintaining this behavior for most months observed. Our analysis also reveals that co-holding is not a static financial position: co-holders regularly deposit and withdraw from asset accounts while simultaneously making new credit card purchases. To test whether co-holding could be addressed through information disclosure, we conducted a large-scale field experiment (n = 125,328), providing clear information about co-holding behavior and its costs. Customers received targeted messages through their bank's mobile app, where they could easily transfer money from assets to pay down debt. Despite sufficient power to detect economically small effects, we found no meaningful changes in debt repayment amount, though customers did respond in other ways---making more frequent repayments and paying above required minimums. These results challenge explanations based on limited attention or information gaps and suggest that simple information disclosure, even when carefully designed and delivered through trusted channels, may not effectively address costly financial behaviors.