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Federal Reserve Bank of Boston
Working Papers
The credit card debt puzzle: the role of preferences, credit risk, and financial literacy
Olga Gorbachev
Maria Jose Luengo-Prado

We use the 1979 National Longitudinal Survey of Youth to revisit what is termed the credit card debt puzzle: why consumers simultaneously co-hold high-interest credit card debt and low-interest assets that could be used to pay down this debt. This dataset contains unique information on intelligence, financial literacy, and preferences, while also providing a complete picture of households’ balance sheets. Relative to individuals with no credit card debt but positive liquid assets, individuals in the puzzle group have higher discount rates, slightly lower financial literacy scores, and very different perceptions on future credit risk: many individuals are using credit cards for precautionary motives.

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Olga Gorbachev & Maria Jose Luengo-Prado, The credit card debt puzzle: the role of preferences, credit risk, and financial literacy, Federal Reserve Bank of Boston, Working Papers 16-6, 07 Jul 2016.
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Keywords: household finance; risk aversion; time preferences; precautionary motives; bankruptcy; foreclosure
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