Credit Card Debt Puzzle: Liquid Assets to Pay Bills Credit Card Debt Puzzle: Liquid Assets to Pay Bills

By Claire Greene and Joanna Stavins

The scenario in which consumers revolve unpaid credit card debt while maintaining some liquid assets, typically as a balance in their bank accounts, is known as the credit card debt puzzle. The scenario is puzzling because the interest rates paid on deposit accounts are always substantially lower than the interest rates charged on revolving credit card balances. This paper explains the puzzle by showing that consumers who hold liquid assets while carrying costly credit card debt often do so in order to pay their monthly bills and other necessary expenses, including mortgage or rent. The authors use holdings, debt, and transaction data from the Diary of Consumer Payment Choice and the Survey of Consumer Payment Choice, nationally representative surveys of US adults administered through a collaboration between the Federal Reserve Banks of Atlanta, Boston, and San Francisco.

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