Many consumers have savings and debt at the same time, and so are faced with a trade-off: how much debt to pay down versus how much savings to retain. This brie
On shifting consumers from high‐interest to low‐interest debt
Abstract In the United States, many consumers are increasingly accumulating debt, much of which is harmful and expensive. Prior research has devoted a great deal of attention to understanding why consumers generally get into debt and the strategies they can use to repay existing debts. While this work has furthered the agenda of helping consumers reduce or eliminate their overall debt balances, it has failed to emphasize the fact that for many consumers, debt may be unavoidable. This article aims to promote research that addresses not only overall debt reduction but also the need for consumers to shift from more to less costly types of debt. By shedding light on the psychological reasons why consumers may naturally gravitate toward more costly forms of debt when less costly ones may be available, we offer a novel perspective on why consumers get into and stay in debt longer than they should. This new angle has the potential to spur on further research into the ways consumers can use debt more effectively and less expensively in service of the overarching goal of debt reduction.
The Co-holding Puzzle: New Evidence from Transaction-Level Data
Using detailed and highly disaggregated data on household finances, we examine the<br>tendency of consumers to “co-hold” savings and debt simultaneously. The di
When Motivation is against Debtors' Best Interest: The Illusion of Goal Progress in Credit Card Debt Repayment
The authors explore the illusion of goal progress by consumers who own multiple credit cards and pay off their debt balances to facilitate the achievement of their subgoal rather than the superordinate goal of being debt-free. The first experiment shows that debtors use their savings toward the credit card debt they can pay off entirely or substantially, even if it is associated with the smallest balance and the lowest annual percentage rate rather than toward the debt with the highest annual percentage rate. The second experiment reveals that when the income available to pay down the debt is in the form of effortless money (i.e., windfall or reward money) as opposed to hard-earned savings, the tendency to allocate money toward the smallest credit card debt is exacerbated. However, people tend to pay their debt more rationally when the number of debt accounts increases. Finally, the third experiment shows that credit card debt repayment decisions depend on the nature of the debt (hedonic vs. utilitarian) and the timing of consumption benefits (past vs. future). The article concludes with a discussion of managerial and public policy implications.
Does Saving Cause Borrowing? Implications for the Co-Holding Puzzle
Using an experiment in which 3.1 million bank customers were encouraged to save, we explore the mechanisms behind co-holding liquid savings and credit card debt. Theoretically, we first show that the joint responses of spending, saving, and borrowing to the nudge differ for different economic models of co-holding. Using machine learning techniques, we then find that the most responsive individuals reduce spending and increase their savings by 4.9% (206 USD PPP per month) while their credit card debt remains unchanged. For them, the marginal responses to the nudge are consistent with our model of co-holding for the purpose of self- or partner control.
Keeping Cash and Revolving Debt: How Consumers' Preference for Spending on Debit versus Credit Influences their Decision to Co-Hold
This paper investigates "co-holding'"–whereby consumers simultaneously maintain low-yield liquid assets and high-interest revolving debt–through the l
Co-holding behaviour: unlocking the puzzle
This article seeks to explain why households decide to simultaneously hold both credit and savings products. Beyond the arguments of ignorance or behavioural biases commonly used in the literature,...
Payment Rewards and Credit Card Debt: Experimental Evidence
We report on a controlled laboratory experiment in which participants make consumption, saving, and credit card repayment decisions when credit card purchases e
Does Saving Cause Borrowing? Implications for the Coholding Puzzle
ABSTRACT Using an experiment in which 3.1 million bank customers were encouraged to save, we explore the mechanisms behind coholding liquid savings and credit card debt. Theoretically, we show that the joint responses of spending, saving, and borrowing to the nudge differ across economic models of coholding. Using machine learning techniques, we find that the most responsive individuals reduce spending and increase savings by 4.9% (206 USD PPP per month) while their credit card debt remains unchanged. These individuals' marginal responses to the nudge are consistent with our model of coholding for the purpose of self‐ or partner‐control.
Savers and Borrowers: Strategies of Personal Financial Management
Saving and borrowing are traditionally and stereotypically thought of as opposites, with different motivations and consequences. Through a questionnaire survey of economic position, practices, and attitudes, the present paper examined the relation between saving and borrowing among British respondents. While saving and borrowing were found to be determined by different economic, social, and psychological factors, they did not describe mutually exclusive strategies of financial management. Saving regularly could also be distinguished from having savings. In all, six strategies were identified (combining saving or not saving, borrowing or not borrowing, and having or not having savings). Each combination was found to have specific discriminating characteristics. Savers and borrowers were found to have different psychological motivations, seeing debt either as a failure or as a normal part of everyday life. Many people retained savings or carried on saving at the same time as having debts: they were found to feel more in control and optimistic about their financial position than those who had debts but no savings. A further group had neither debts nor savings: they adopted an inflexible approach to financial management. Each group of people with different financial management strategies was illustrated by a case study.
Consumer Financial Decision Making: Where We’ve Been and Where We’re Going
When making purchasing decisions, consumers consider their available budget and determine what payment method they will use as well as how they will finance the purchase. Consumers must also plan for long-term consumption by considering short- and long-term savings objectives, taking into account how they will invest money saved, as well as how they will borrow needed money and repay outstanding loans. This issue of the Journal of Association of Consumer Research explores financial decision making, which we define as the accumulation and use of resources across time, as reflected by consumers’ behavior and choices.
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.
Knowing When to Spend: Unintended Financial Consequences of Earmarking to Encourage Savings
Maintaining savings is an important financial goal. Yet there are times when savings should be spent, such as when people face unavoidable costs, and spending their savings allows them to avoid high interest rate debt. Existing behavioral research has focused on consumer decisions between savings and discretionary spending and has proposed interventions to promote savings in these contexts. However, when spending is not discretionary, such interventions could risk exacerbating a pattern found in economic research in which people borrow high interest rate debt while maintaining savings that earn low levels of interest. To examine how mental accounting interacts with considerations of personal responsibility and guilt to contribute to this pattern, this article explores whether people spend their savings when they need money most: during emergencies. Six studies reveal that people's tendency to preserve savings by borrowing from a high interest rate credit option varies as a function of the savings’ intended use. Paradoxically, people are most likely to turn to high interest rate credit with the belief that doing so is the responsible option.
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
“Repayment-by-Purchase” Increases Consumer Debt Repayment
This article tests the effect of a novel credit card payment format—repayment-by-purchase—on consumers’ payments toward credit card debt. In contrast to typical balance repayment, where consumers make repayments relative to a total amount owed, repayment-by-purchase prompts consumers to select items (e.g., a Starbucks coffee) or categories of purchase (e.g., restaurant and café purchases) and to make payments toward their related debt. A field experiment first suggests that customers who opted into repayment-by-purchase paid 12.18% more toward their statement balance than a control group. Subsequently, five lab experiments show that consumers repaying-by-purchase increase repayment by an average of 22.47% over typical balance repayment. Process evidence suggests that these differences may be driven by repayment-by-purchase's power to increase purchase salience, which in turns increases perceptions of progress toward reducing debt. Consistent with this theory, the effect of repayment-by-purchase on bill repayment emerges regardless of whether consumers repay durable versus nondurable goods, and for specific items or categories of purchases, as long as the bill uses labels that are concrete enough to raise past purchase salience.
The Debt Payment Puzzle: An Experimental Investigation
Why do borrowing individuals fail to repay their debt optimally? We design a diagnostic laboratory experiment where we rule out selection into debt and other co
Misunderstanding Savings Growth: Implications for Retirement Savings Behavior
People systematically underestimate exponential growth. This article illustrates this phenomenon, its implications, and some potential interventions in the context of saving for retirement, where savings grow exponentially over long periods of time. Experiment 1 shows that a majority of participants expect savings over 40 years to grow linearly rather than exponentially, leading them to grossly underestimate their account balance at retirement. Experiment 2 demonstrates that this misunderstanding leads to underestimates of the cost of waiting to save, which makes putting off saving more attractive than it should be. Finally, Experiments 3–5 show that highlighting the exponential growth of savings motivates both college students and employees to save more for retirement. Making clear to employees the exponential growth of savings before they make crucial decisions about how much to save may be a simple and effective means of increasing retirement savings.