Intra-household Frictions, Anchoring, and the Credit Card Debt Puzzle

Abstract

I explain the credit card debt puzzle – the co-holding of high-cost debt and low-yield liquid assets – with a household and individual determinant that lower debt repayments. At the household level, co-holding is consistent with intra-household frictions. Couples co-hold 40 percent more than individuals relative to income, and couples do not cooperate when given an option to reduce high-cost debt. At the individual level, anchoring contributes to co-holding, because credit card debt payments are often equal to or near the minimum despite high liquidity. Individuals with low regular payments account for over half of total individual co-holding.

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Erkki Vihriälä
Postdoctoral Researcher