Why would you leave money in a checking or savings account while also carrying a credit card balance? Economists call this question the credit card debt puzzle. That’s because simultaneously holding both liquid assets and credit card debt seemingly makes no sense if the interest rates paid on deposit accounts are substantially lower than the interest rates charged on unpaid credit card balances — which they always are. In late 2021, the average rate paid was 0.06%, and the average rate charged was 16.13%.

And yet in 2019, according to a new Federal Reserve Bank of Boston working paper, 42% of the people surveyed carried — or “revolved” — credit card debt while maintaining some liquid assets, typically as a balance in their bank accounts. The paper was written by Boston Fed senior economist and policy advisor Joanna Stavins and Federal Reserve Bank of Atlanta payments risk expert Claire Greene.

The authors look at why consumers make such a choice. As indicated by the paper’s title, “Credit Card Debt Puzzle: Liquid Assets to Pay Bills,” Stavins and Greene show these “borrower-savers” left money in the bank to cover monthly bills and other necessary expenses including mortgage or rent. They find that more than 80% of borrower-savers’ bills (by value) were paid using checks, online bill payments, and other out-of-bank-account payment instruments.

“Even those consumers who carry costly unpaid credit card debt must keep a substantial balance in liquid assets to pay their bills,” the authors write. “Thus, the credit card puzzle is not a puzzle at all.” 

The paper uses holdings, debt, and transaction data from the Diary of Consumer Payment Choice and the Survey of Consumer Payment Choice. These nationally representative surveys of U.S. adults are administered through a collaboration between the Federal Reserve Banks of Atlanta, Boston, and San Francisco. The authors classify as borrower-savers anyone in the surveys who carried $100 or more in revolving credit card debt and held $100 or more in liquid assets.

“If consumers maintain a positive balance in their deposit account to pay their regular monthly bills, they do not view that money as an investment,” Stavins and Greene write. “In such cases, even if the interest rate paid on the deposit account is zero, consumers may want to maintain a positive balance to avoid paying fees for late payments or, once monthly bills and other regular expenses are accounted for, to be able to cover unexpected expenses in an emergency.”

The authors also show that most borrower-savers don’t pay off their credit card balances each month because they can’t come close to doing so. Only 40% had liquid assets that were greater than their unpaid credit card balance in 2019. The average borrower-saver carried almost $6,400 in unpaid credit card debt and had $5,400 in liquid assets, including checking and savings accounts, cash, and general-purpose prepaid cards. They paid, on average, $2,616 in monthly bills, such as utilities and rent or mortgage, and $1,555 in purchases, such as groceries and gas, which totals $4,171, or 77% of their liquid assets. So, on average, borrower-savers’ liquid assets could cover only about 60% of their unpaid debt plus their monthly bills.

Household debt is associated with a higher probability of revolving on a credit card

The authors find that in almost every category of assets or debts, both housing and non-housing related, borrower-savers were significantly worse off financially than savers. “Thus, the differences between borrower-savers and savers are much broader than just their credit card debt and bank account balances; they extend to mortgage debt and home equity,” Stavins and Greene write. They define savers as credit card holders who have at least $100 in liquid assets and less than $100 in unpaid credit card debt. This group comprised 52% of credit card holders in 2019.

Even when the authors control for income and demographics in a regression, they find that carrying a mortgage or other debt, such as auto or educational loans, is associated with a higher probability of revolving on a credit card. This suggests that the various types of household debt — credit card debt, mortgage, and student and auto loans — are complements rather than substitutes. In other words, consumers who carry one type of household debt are more likely to also carry other types of household debt.

Share of consumers who were borrower-savers decreased during the pandemic

During the COVID-19 pandemic in 2020, consumers’ unpaid credit card debt decreased, and their liquid assets increased, on average. Consequently, the share of borrower-savers in the survey dropped from 42% to 35%.

However, the amount they paid in monthly bills and for purchases remained about the same. In 2020, borrower-savers’ average monthly bills were $2,658 and their credit card debt was $5,572, which combined ($8,230) still outstripped their average liquid assets of $7,804. And those bills and debt do not include necessary purchases such as gas and groceries.

“It is therefore likely that the fraction of consumers who are borrower-savers will increase again when the additional savings accumulated during the period of (pandemic-related) stimulus payments are depleted,” Stavins and Greene write.