Credit Card Debt Puzzles

• Authors: Michael Reiter.
• BSE Working Paper: 112258 | September 15
• Keywords: Credit Cards , debt , self control , household portfolios
• JEL codes: E210, G110
• Credit Cards
• debt
• self control
• household portfolios

Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an “accountant-shopper” framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.