The Credit Card Debt Puzzle: New Facts and Theory

Abstract

Simultaneously holding liquid assets and credit card debt is known as the credit card debt, or co-holding, puzzle. Around 45% of households in the US Panel Study of Income Dynamics (2010-2014) fall into this category. I revisit the puzzle from the perspective of the degree of co-holding and show around 40% of co-holders hold between 2 and 200 times more liquid assets than credit card debt. This new fact has implications for co-holding explanations based on liquidity. I propose an alternative explanation in which consumers value money and thus dislike making payments. This explanation has applications to a range of consumer choices, such as Buy Now Pay Later and the credit card premium. JEL Classifications: D11, D12, D14, G51