Credit Card Behavior, Financial Styles, and Heuristics

Abstract

The paper makes four contributions. First, it provides new data and findings about credit card usage segmentation in respect to spending and borrowing behavior. Second, it sets the new findings against the backdrop of the newly emerging literature on financial literacy. There is great variability in financial literacy across American consumers. Third, it describes fast and frugal heuristics aimed to help consumers make effective, and in some cases better, budgeting decisions when they use credit cards. Fourth, it describes the introduction of a new set of online financial tools, offered by a large credit card company, which consumers are now using to make decisions about their spending and borrowing, and links these tools to the heuristics under discussion. Fast and frugal heuristics are likely to be especially valuable to consumers with low confidence in their online skills. Notably, 25 percent of credit card holders report they have low confidence using online technology to manage their finances, with the corresponding figure being 44 percent for those most at risk.