Credit Card Debt Puzzles and Debt Revolvers for Self Control

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 can resolve the former but not the latter puzzle (Laibson et al., 2003). This paper combines, updates, and extends the theoretical and empirical analysis of the accountant-shopper setup originally presented in Bertaut and Haliassos (2002) and Haliassos and Reiter (2005). It shows that the separation of accounting and shopping made possible by credit cards can generate both types of co-existence and target credit card utilization rates consistent with Gross and Souleles (2002), even when accountant and shopper are engaged in a rational, dynamic game. When the shopper is more impatient than the accountant, it is not necessarily optimal for the accountant to sell assets to pay off debt: the impatient shopper can charge more and restore debt to its previous level. We show that the accountant-shopper setup can match both the observed incidence of debt revolvers with substantial assets and median asset holdings for modest relative impatience. Matching other moments is likely to require heterogeneity in presence and degree of spending control problems among households. We present empirical evidence consistent with a role for spending control considerations, where present, after controlling for standard factors influencing credit card debt.