NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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John Gathergood

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NBER Working Papers and Publications

December 2017How Do Individuals Repay Their Debt? The Balance-Matching Heuristic
with Neale Mahoney, Neil Stewart, Joerg Weber: w24161
We study how individuals repay their debt using linked data on multiple credit cards from five major issuers. We find that individuals do not allocate repayments to the higher interest rate card, which would minimize the cost of borrowing. Instead, individuals allocate repayments using a balance-matching heuristic under which the share of repayments on each card is matched to the share of balances on each card. We show that balance matching captures more than half of the predictable variation in repayments, performs substantially better than other models, and is highly persistent within individuals over time. Consistent with these findings, we show that machine learning algorithms attribute the greatest variable importance to balances and the least variable importance to interest rates in ...
 
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