Paying Down Credit Card Debt for Hotels Not Sofas

Quispe-Torreblanca, Edika and Stewart, Neil and Gathergood, John and Loewenstein, George, The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels Not Sofas (September 15, 2017). Available at SSRN: https://ssrn.com/abstract=3037416

Abstract: Using transaction data from a sample of 1.8 million credit card accounts, we provide the first field test of a major prediction of Prelec and Loewenstein’s (1998) theory of mental accounting. The prediction is that consumers will pay off expenditure on transient forms of consumption more quickly than expenditure on durables. According to the theory, this is because the pain of paying can be offset by the future anticipated pleasure of consumption only when money is spent on consumption that endures over time. Consistent with the prediction, we found that repayment of debt incurred for non-durable goods is an absolute 9% more likely than repayment of debt incurred for durable goods. The size of this effect is comparable to an increment in 15 percentage points in the credit card APR.

Keywords: mental accounting, credit cards, debt repayment
JEL Classification: D14, D91