Borrowing money on a credit card is expensive. Despite the cost, nearly 44 percent of credit card holders carry balances.1 Financing credit card borrowing represents a significant burden for U.S. households. The average debt level reported by individuals with card balances was around $5,000 in 2004 (2004 dollars), financed at an average rate of over 11 percent per year (Bucks, Kennickell, and Moore 2006). Financial distress associated with managing such credit card debt may contribute to the high rates of personal bankruptcy filing (Domowitz and Sartain 1999; Stavins 2000; White 2007). The high expense of carrying credit card debt, particularly in the face of the apparent availability of lower-cost alternative financing, has led researchers to examine the underlying determinants of card borrowing. This research has followed two primary paths.
Credit Card Debt and Payment Use
First, traditional (neoclassical) economic reasoning explains the carrying of high credit card debt as cost-minimizing behavior. According to that reasoning, financing consumption with credit cards may actually be less expensive, not more, than plausible alternatives, when costs associated with insufficient liquidity, arranging alternative financing, and switching credit contracts are fully taken into account. Second, a behavioral view of carrying credit card debt has associated card borrowing with self-control problems. Credit cards temporally separate the enjoyment of consumption from the pain of paying for it. This decoupling may be particularly attractive for individuals who disproportionately overvalue present consumption and undervalue future costs.
High levels of credit card debt and the consequences for the broader economy as well as for the individual debtor make the study of individuals who carry credit card balances an important topic in payments research. Whether the explanation is behavioral or traditional, the implications of credit card debt for payment behavior are similar. Cardholders who carry unpaid credit card balances—also called revolvers—face finance charges for their marginal purchases. Under the cost-based explanation, rational individuals should substitute from credit cards to alternative payment methods, provided they have sufficient liquidity to do so.
Following the behavioral reasoning, individuals with credit card debt (and self-control problems) may substitute from credit cards to alternative payment methods as a self-control device. Importantly, the two competing explanations of credit card debt generate hypotheses that, when tested, are observationally equivalent. Under either explanation, indi1Based on the 2004 Survey of Consumer Finances. 2 viduals with revolving balances should use credit cards less and alternative payments more. To date, evidence of such substitution by individuals with revolving balances has been lacking. Notable exceptions are Zinman (2007a) and Klee (2006), whose studies of credit card adoption both show that credit card revolvers are more likely than other credit card users to adopt debit cards. Although this is an important step towards explaining the payment behavior of revolvers, we argue that there is a significant difference between adopting a payment mechanism and actually using it at the point of sale.
This paper attempts to further develop a picture of how carrying revolving balances impacts actual payment activity. Using data from the Survey of Consumer Payment Preferences for over 1,800 individuals who hold both credit and debit cards, we explore the effects of revolving balances on payments made with four different payment methods: credit card, debit card, check, and cash. We find significant evidence of substitution of debit for credit by individuals with unpaid credit card balances. Individuals who regularly carry revolving balances make a significantly lower fraction of their total payments with credit and a significantly higher fraction of their total payments with debit. In contrast, there is no significant difference in the use of check or cash between revolvers and convenience users. Furthermore, revolvers are much more likely than convenience users to report debit as being the payment method chosen most frequently at the point of sale.
Unlike the previous literature related to this topic, this study addresses the actual use of payment instruments by revolvers. We complement our analysis of payment behavior with qualitative data on payment attribute perceptions. Perceptions—or perceived differences in payment attributes— have been found to be important determinants of consumer payment behavior (see Hirschman 1982; Miyazaki and Fernandez 2001; Mantel 2000; Jonker 2005; Schuh and Stavins 2008).
We attempt to identify revolvers’ perceptions of debit cards that may be linked to their substitution behavior. We show that individuals with revolving balances are much more likely than convenience users to feel that debit offers superior budgeting and control over money than credit. Such attribute perceptions are likely to be important determinants of payment substitution. Our results are the first to show substitution from credit to debit by individuals with revolving credit card balances, not only in the adoption of payment methods, but in actual payment use.
This substitution is likely motivated by concerns of budgeting 3 and financial control. Provided that perceptions are not fixed over time, our results also point to key attribute perceptions that marketers and policymakers can influence to affect credit card spending. The paper is organized as follows: Section 2 reviews the literature on credit card revolving, discussing implications for payment behavior. Section 3 describes the data. Section 4 presents our results and Section 5 concludes.