Untangling the Credit Card Debt Puzzle

Abstract

This paper documents new facts and untangles mechanisms regarding the credit card debt puzzle that describes the co-holding of high-cost debt and low-yield assets. First, I capture more accurately the costs of co-holding because I identify households who are on decreasing and increasing paths of co-holding. Second, liquidity-based hypotheses are insufficient to explain co-holding because co-holding occurs even with high liquidity and low credit limit risk, and few co-holding households take up an offer of low-cost liquidity. Third, limited intra-household financial pooling contributes to co-holding because couples are more likely to co-hold than individuals, and the intra-household distribution of assets and liabilities affects household demand for low-cost liquidity. Finally, anchoring to the minimum credit card debt payment contributes to co-holding.