Credit Card Debt Puzzles

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 offers a way to resolve the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) sketched an 'accountant-shopper' model with exogenous shopper behavior and offered it as an explanation for the latter, providing empirical evidence in support. The current paper shows that a fully-specified accountant-shopper model can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). Comparison of costs of potential self-control mechanisms over the life cycle, including use of debit cards, support the view that high-interest credit card balances may be motivated partly by consumption smoothing and partly by self- or partner control for households who have difficulty controlling credit card expenditures