Credit Card Debt Puzzle: Liquid Assets to Pay Bills 
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.
Key Findings
- In 2019, 42 percent of the consumers in this paper's sample were "borrower-savers"; that is, they carried $100 or more in revolving credit card debt and held $100 or more in liquid assets.
- Only 40 percent of borrower-savers had liquid assets 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.
- The average borrower-saver paid $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 percent of their liquid assets.
- On average, the value of borrower-savers' liquid assets could cover only about 60 percent of their unpaid debt plus monthly bills.
- More than 80 percent of borrower-savers' bills by value were paid using out-of-bank-account payment instruments, so the account balances were needed to cover those bills.
- During the COVID-19 pandemic in 2020, consumers' unpaid credit card debt decreased, and their liquid assets increased on average. Consequently, the fraction of borrower-savers in the sample dropped from 42 percent of the sample to 35 percent.
- In 2020, borrower-savers' average monthly bills of $2,658 and credit card debt of $5,572 still outstripped their average liquid assets of $7,804, even without the inclusion of necessary purchases such as gas and groceries.
Implications
In addition to the above results, 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—defined as credit card adopters who have at least $100 in liquid assets and less than $100 in unpaid credit card debt, a group that comprises 52 percent of credit card adopters. Thus, the differences between borrower-savers and savers extend beyond their credit card debt and bank account balances and include mortgage debt and home equity. 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, suggesting that various types of household debt are complements rather than substitutes.
Regarding the findings related to the COVID-19 pandemic, although the fraction of consumers who were borrowers-savers declined significantly in 2020, the amount they paid in monthly bills and for purchases remained about the same, on average. Therefore, it’s likely that the share of consumers who are borrower-savers will increase once the additional savings accumulated from the pandemic-related stimulus payments are depleted.
Abstract
Using transaction data from a US consumer payments diary, we revisit the credit card debt puzzle—a scenario in which consumers revolve credit card debt while also keeping liquid assets as bank account deposits. This scenario is very common: 42 percent of consumers in our sample were borrower-savers in 2019 (those who carry $100 or more in credit card debt and $100 or more in liquid assets). We explain the puzzle by showing that consumers need their liquid assets to pay monthly bills and other necessary expenses, including mortgage or rent. More than 80 percent of bills by value were paid out of bank accounts and could not be charged to credit cards, so bank account balances were needed to cover those basic expenses.
On average, borrower-savers' credit card debt exceeded their liquid assets. 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. Only 40 percent of borrower-savers had liquid assets greater than their unpaid credit card balance. In addition, borrower-savers' monthly expenses (bills and purchases) averaged 77 percent of their liquid assets, not leaving enough to repay their credit card debt. On average, the value of their liquid assets could cover only about 60 percent of their unpaid debt plus monthly bills.
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. Even when we control for income and demographics in a regression, we 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, suggesting that various types of household debt are complements rather than substitutes.
During the COVID-19 pandemic in 2020, consumers' unpaid credit card debt decreased and their liquid assets increased, so the fraction of borrower-savers dropped to 35 percent of the sample.