Credit Cards: Transactional Convenience or Debt‐Trap?

AuthorStephen Brown,Yulia Veld‐Merkoulova,Chris Veld
Date01 June 2020
Published date01 June 2020
Credit Cards: Transactional
Convenience or Debt-Trap?*
David S. Loeb Professor of Finance, Stern School of Business, New York University,
New York, NY and
Department of Banking and Finance, Monash University, Cauleld East, Victoria,
We survey individuals on their credit card usage. Contrary to popular press,
most credit card holders use credit cards in a responsible manner. They tend
to use credit cards for transaction convenience and pay little interest. Only a
minor subset of people uses credit cards to access expensive credit, with only
7% of credit card holders in our sample never paying the balance in full.
Credit card debt is more common among older, less nancially literate, and
less trusting respondents. Even individuals with credit card debt are well
aware about its costs and are likely to make informed nancial choices.
JEL Codes: D14; D91; G11
Accepted: 20 July 2018
Household debt remains one of the most under-researched areas in nance.
However, the economic signicance of household debt is very high. For exam-
ple, in the US, in the fourth quarter of 2016, the ratio of household debt to the
gross domestic product was 80.1%.
At the same time, 42.4% of households in
the euro area of the European Union was indebted with a median outstanding
amount of debt (conditional on holding debt) of 28,200.
Zinman (2015)
* We thank Anup Basu, Mark Doolan, Pascalis Raimondos, Ayesha Scott, Daniel Smith, Arthur van
Soest, participants at the Q-Group meeting in Melbourne (March 2017), and seminar participants at
the Erasmus University Rotterdam, Deakin University, Queensland University of Technology, and
University of Glasgow for their helpful comments and Marije Oudejans for her help with the panel
data. Special thanks go to an anonymous reviewer, and Xiaoyun Yu (the Editor) for their useful
insights. The authors acknowledge nancial support from the Monash Business School and La
Chaire Dauphine ENSEA Groupama Les particuliers face au risqueof the Fondation du Risque and
LAgence Nationale de la Recherche in the context of the project ANR Risk.
1 Source: Federal Reserve Bank of St. Louis,,
retrieved on November 27, 2017.
2 Source: Household Finance and Consumption Network survey of the European Central Bank.
Second wave, December 2016. See:
pdf, retrieved on November 27, 2017.
© 2018 International Review of Finance Ltd. 2018
International Review of Finance, 20:2, 2020: pp. 295322
DOI: 10.1111/ir.12228
argues that research on household debt has lagged both research on the asset
side of the household balance sheet and research on corporate debt.
Among household debt, credit card debt is often cited as a major source of
nancial problems, with multiple government and nonprot services trying to
educate presumably ignorant consumers about the hazards of such debt. For
example, many publications and websites give advice on how to handle debt.
This advice usually comes down to limiting credit card debt. The website Bank-
rate lists 10 bad money habits that lead to debt disaster.They write, If you
have to reach for plastic to make it through the month, thats a huge red ag.
Despite the large number of articles in the (nancial) press arguing that per-
sonal debt levels, particularly credit card debt levels, are unsustainable, there is
relatively little research on exactly how individuals and households use credit
cards. In this paper, we study debt-related decisions at the individual level.
While households carry large amounts of debt, previous studies argue that indi-
viduals do not rationally handle debt (e.g., Ausubel 1991). Cargill and Wendel
(1996) document that credit card holders do not search for low credit card
interest rates because they expect to use the cards only for transaction conve-
nience rather than as a source of credit. However, some credit card holders do
carry positive balances and therefore pay credit card interest. By not shopping
for low interest rates, they act irrationally. Another example of unexplained
borrowersbehavior is the so-called credit card debt puzzle, where holders of
high-interest credit card debt often also have money available in bank accounts,
which pay very little interest (Gross and Souleles 2002; Telyukova 2013).
We employ a well-established survey panel representative of the population
of the Netherlands to study determinants of credit card use. We nd that, con-
trary to the nancial press and previous studies, which view credit cards primar-
ily as an expensive and irrational form of debt, credit card use is largely well-
informed and restrained. Many credit card users emphasize their value as a
method of payment. They value, for example, the convenience of a credit card
to make payments both domestically and abroad. These credit card holders act
responsibly and, most of the time, avoid paying interest charges altogether.
More than 80% of our sample always pays off the balance, either automatically
(36% of our sample) or otherwise (46%). Only a small part of credit card users
use their credit cards to access expensive credit and only 7% of our sample
always carries a full balance. Even this small group of credit card debt holders
may well be acting rationally if the marginal utility of the increase in their cur-
rent consumption due to credit card debt outweighs the marginal costs of
this debt.
For the subsample of credit card debt holders, our results complement the
studies of Tan et al. (2011), Telyukova (2013), and Kuchler (2016), which focus
on individuals with credit card balances. We nd that, even in this subsample,
most of the time, households are aware of their credit card debt and its costs.
3 See
aspx, retrieved on November 27, 2017.
© 2018 International Review of Finance Ltd. 2018296
International Review of Finance

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