No.

082

CreditCardDebtandPaymentUse
CharlesSprengerandJoannaStavins

Abstract:
Approximately half of credit card holders in the United States regularly carry unpaid
creditcarddebt.Thesesocalledrevolversexhibitpaymentbehaviorthatdiffersfrom
thatofthosewhorepaytheirentirecreditcardbalanceeverymonth.Previousliterature
hasfocusedontheadoptionofdebitcardsbypeoplewhocarrycreditcardbalances,but
sofartherehasbeennoempiricalanalysisexploringtherelationshipbetweenrevolving
behavior and patterns of payment use, such as substitution away from credit cards to
otherpaymentmethods.

Usingdatacollectedinthe2005SurveyofConsumerPaymentPreferences,weexplore
therelationshipbetweenrevolvingcreditcardbalancesandpaymentuse.Wefindthat
credit card revolvers are significantly more likely to use debit and less likely to use
credit than convenience users who repay their balances each month. There is no
significantdifferencebetweenthesetwotypesofcreditcardusersintheiruseofcheck
or cash. The two groups differ in their perceptions of payments as well as in their
paymentbehavior:revolversaresignificantlylesslikelytoviewdebit assuperiorwith
respect to ease of use and acceptability, but more likely to see debit as superior with
respecttocontrolovermoneyandbudgeting.

JELClassifications:D12,D14,E21
keywords:payments,creditcard,debitcard,consumercredit

CharlesSprengerisagraduatestudentattheUniversityofCalifornia,SanDiego.JoannaStavinsisasenior
economistandpolicyadvisorattheFederalReserveBankofBoston.Theiremailaddressesare,respectively,
csprenger@ucsd.eduandjoanna.stavins@bosfrb.org.
Thispaper,whichmayberevised,isavailableonthewebsiteoftheFederalReserveBankofBostonat
http://www.bos.frb.org/economic/wp/index.htm.
WearegratefultoChrisFoote,StephanMeier,andScottSchuhforhelpfulcomments,andtoBenjamin
Levingerforresearchassistance.
TheviewsexpressedhereinaresolelythoseoftheauthorsandnotthoseoftheFederalReserveSystemor
theFederalReserveBankofBoston.

Thisversion:May2008

Introduction

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. 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 balancesalso called revolversface 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, indi1

Based on the 2004 Survey of Consumer Finances.

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. Perceptionsor 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.

Literature Review

Carrying credit card balances from month to month is an apparently expensive way
to finance consumption. This high cost has motivated two broad paths of research
seeking to explain the underlying determinants of holding such revolving balances.
The first, more traditional path attempts to explain credit card debt with cost-based
explanations. The second path, behavioral in nature, has sought to explain credit card
debt with psychological factors such as self-control problems.
Traditional economic explanations for credit card debt are based on analysis of the
relative cost of credit card borrowing compared with other sources of credit. Although
credit card borrowing may seem expensive, some economists suggest that alternatives
may be even more costly. The price of borrowing may include not only the interest
rate, but also the difficulty of arranging alternative financing and the costs of switching
across credit contracts.
Brito and Hartley (1995) indicate that the cost of paying interest on credit card debt
is likely to be lower than the transaction costs associated with arranging loans from
banks or other financial institutions. Telyukova and Wright (2005) and Zinman (2007b)
show that consumers maintain balances in their low-interest-bearing bank accounts
for liquidity reasons, even while carrying high-interest credit card debt. The authors
suggest that a rational consumer may pay interest on credit card debt to avoid some of
the expected costs associated with not holding precautionary or transactions balances.
Researchers have also argued that high costs of switching credit contracts may play
a role in consumers decision to maintain balances on their credit cards (see Calem
and Mester 1995; Calem, Gordy, and Mester 2005; Ausubel and Shui 2005). These
traditional cost-based explanations show that credit card debt, despite high interest
rates, may actually be a lower-cost source of financing than other options. This view is

supported by evidence suggesting that the actual value of credit card debt is negatively
correlated with changes in interest rates, showing price sensitivity in card borrowing
(Gross and Souleles 2002).
Traditional cost-based explanations are somewhat at odds with a growing body
of behavioral research on credit card borrowing. Laibson, Repetto, and Tobacman
(2000) use a model of a consumer with self-control problems to explain the household
portfolio puzzle of holding both credit card debt and low-interest illiquid assets, such
as retirement accounts. Meier and Sprenger (2007) show that directly measured selfcontrol problems are strongly correlated with credit card debt. Ausubel (1991) suggests
that self-control problems play a primary role in generating credit card industry profits;
and Ausubel and Shui (2005) indicate that self-control problems can explain the success
of teaser rates in credit card markets.
The nature of credit cards may make credit card spending (and borrowing) particularly susceptible to self-control problems. Behavioral research on credit card use
highlights decoupling: the separation of payment decisions from consumption decisions
(for discussions, see Prelec and Lowenstein 1998; Thaler 1999). With a credit card,
payment is separated from the act of purchasing and can occur substantially later than
purchase or consumption. Psychologically, such temporal separation may encourage
credit card spending and, consequently, credit card debt (Bar-Gill 2004).
For the purpose of this paper, we do not specifically endorse either the traditional
or the behavioral view of credit card borrowing. Instead, we seek to understand the
payment patterns of credit card borrowers, and the two views generate hypotheses that,
when tested, are observationally equivalent. That is, under both views, individuals with
revolving balances are more likely than convenience users to use alternative payment
media at the point of sale.
Under the traditional view, consumers minimize their costs. Credit card revolvers
with no liquidity constraints would choose not to borrow, in order to avoid the cost of
financing. In this cost-based approach, a rational consumer would choose the lower-cost
option, that is, a rational consumer would use credit less, and other payment methods
more.
The behavioral view would see the use of alternative payment instruments as an act
of will, a commitment device chosen by an individual who has self-control problems with
respect to credit card spending. In this view, individuals with revolving balances are the
ones with such self-control problems. Even though only sophisticated individuals,
5

cognizant of their self-control problems, would take up such a commitment device,

one would expect revolvers to be more likely than non-revolvers to choose alternative
payment methods, all else being constant.
Zinman (2007a) and Klee (2006) have shown that individuals who carry revolving
credit card balances are significantly more likely than convenience users to adopt debit.
There is a critical difference between adopting a payment instrument and actually using
it at the point of sale. Individuals with self-control problems may obtain a debit card
as a commitment device, but fail to act as intended (use the debit card) when making
purchases. Furthermore, revolvers who face liquidity constraints (see Telyukova and
Wright 2005; Zinman 2007b) may use credit more than individuals without revolving
balances, in order to avoid insufficient liquidity.
Although the issue of payment instrument adoption by individuals with revolving
credit card balances has been addressed in the literature, empirical evidence showing
the relationship between revolving balances and payment use, such as the substitution
of debit for credit, has been lacking. Using data collected from the 2005 Survey of Consumer Payment Preferences specifically tailored to addressing these issues, we explore
the relationship between revolving credit card balances and payment use.

Data: The Survey of Consumer Payment Preferences

We use survey data specifically tailored to answering the question of how revolving
credit card balances are related to payment method use. In the spring of 2005, Dove
Consulting, jointly with the American Bankers Association, conducted its fourth biannual payments survey, the Study of Consumer Payment Preferences (SCPP). The survey was either distributed by mail or administered on the Internet; 3,008 individuals
over 18 years of age across the United States responded, with a response rate of approximately 15 percent.2
Even though the SCPP sample is supposed to be representative of the United States
population, there are concerns about sample selection that could impact both the generality and the validity of our results. There are issues of sample selection bias with
2
Of the 3,008 respondents, 2,350 completed web-based surveys, and the remaining 658 submitted
surveys by mail.

respect to: (1) survey recipients and (2) survey respondents. The SCPP survey was
sent to individuals from a list generated by a private marketing firm. The process of
choosing recipients appears not to have been a random selection of individuals from
the population. In order to induce responses, three $1,000 lottery prizes were offered to
respondents. The presence of this lottery likely generates differences between respondents and nonrespondents. Respondents may have a lower opportunity cost of time
and/or be more risk-loving than nonrespondents.
In addition to these potential sample selection issues, there are demographic differences between the SCPP sample and the broader population. SCPP survey respondents
have, on average, higher levels of education and are more likely to be in middle age and
income groups when compared with the U.S. population. Previous research has shown
the importance of such demographic characteristics for payment behavior (see, for example, Stavins 2001; Mester 2003; Anguelov, Hilgert, and Hogarth 2004). Despite
not being fully representative of the U.S. population, the SCPP contains a depth of
information on payment behavior and consumer perceptions of payments not available
from any other survey to date.3
To explore the relationship between revolving credit card balances and payment
use at the point of sale, we take a subsample of SCPP respondents. Our analysis
focuses on the 62.5 percent of the sample, 1,880 individuals, who hold both credit
and debit cards and have non-missing socio-demographic characteristics and paymentrelated responses (see below). Forty-three percent of the sample, or 807 individuals,
report regularly carrying balances on their credit cards.4
Table 1 shows the socio-demographic characteristics of individuals included in our
analysis for all cardholders, revolvers, and convenience users. Individuals in the sample
are predominantly white, under 45 years old, with at least some college education
and income between $40,000 and $100,000. On average, people in the sample have
reasonably high levels of financial experience: the average length of time for which
a person has held his or her primary checking account exceeds 11 years. As can be
seen, there are few differences in socio-demographic characteristics between individuals
who do and do not carry credit card balances. Individuals with revolving balances are
3

Schuh and Stavins (2008) explore other data on payment behavior and perceptions of payments.
The question was worded as I regularly carry a balance on my credit card (do not pay off
the balance in full). The fraction of revolvers is almost identical to that in the 2004 Survey of
Consumer Finances, where approximately 44 percent of credit card holders carried balances (authors
calculation).
4

generally younger than those who repay their balances. In the following sections, we
test whether the two groups of cardholders differ in their payment behavior.

3.1

Payment Use

Our primary measures of payment use at the point of sale are: (1) the fraction of total
payments made with a given payment instrument and (2) the payment instrument
cited as the one most frequently used at the point of sale.
The survey asks respondents to indicate how many purchases they make with a
given payment instrument in stores in a given week. The question is worded as, How
often do you use the following payment methods to make purchases in stores? The
options are Dont use, Once a week or less, 24 times per week, 57 times per week,
or 8 or more times per week.
For payments made with credit card, debit card, check, and cash we take the
midpoint of the interval response as the number of payments made.5 For each payment
instrument, we take the number of payments made with payment j, and divide by the
total number of payments made by consumer i, to obtain the fraction of purchases
made by consumer i with payment j .

Nij

F ractionij = P

p{Credit,Debit,Cash,Check} Nip

(1)

where Nij is the number of payments made by consumer i with payment j.

The resulting variables Fraction Credit, Fraction Debit, Fraction Check, and Fraction Cash are used as dependent variables in our analysis.
In addition to asking respondents about a total number of payments, the survey
also asks respondents to state which payment instrument they use most frequently at
the point of sale. The question is worded as, When you make purchases overall, which
method of payment do you use most often?
Responses to this question generate four binary variables used in our analysis:
5

In the SCPP data, the highest response, > 8 payments, is top-coded as 10. The results are
robust to variations in this top-coding. The lowest response is coded as zero.

Most Frequent Credit, Most Frequent Debit, Most Frequent Check, and Most Frequent
Cash. These variables are equal to 1 if the given payment instrument is chosen most
frequently, and 0 otherwise.
In addition to these payment behavior variables, the survey also asks respondents
to report their participation in credit and debit card rewards programs. Such program
participation changes the relative price of using a certain payment instrument and so
represents an important determinant of payment behavior (for evidence, see Ching and
Hayashi 2006). Of our sample of 1,880 individuals, 1,722 answered the question that
asked whether or not they had either debit card or credit card rewards, or both.
Summary statistics for these payment variables are presented in Table 2 by revolving
behavior. Unlike the demographic variables, these variables show that individuals
with revolving balances exhibit payment patterns that differ significantly from those
of convenience users. Even though cash and check payment behavior is similar across
revolvers and convenience users, revolvers show significant substitution from credit to
debit. Individuals with revolving balances cite a significantly lower fraction of total
payments made with credit and a higher fraction of total payments made with debit.
Revolvers are also significantly more likely to cite debit, and significantly less likely to
cite credit, as their primary payment choice.

3.2

Perceptions of Payments

In addition to asking about payment use, the SCPP asks a series of questions on
individual perceptions of payment instruments. The responses to these questions allow
us to explore the underlying reasons for the payment behavior that consumers report.
For each payment instrument, respondents were asked whether they view it as: easy
to use, widely acceptable, safe, allowing control over money, helping in budgeting, and
easy to get refunds or resolve disputes (for the design of these survey questions, please
see the appendix). Individuals responded either yes or no to each question, for each
payment instrument.
The perceptions of payments elicited in the SCPP provide an opportunity to see
what consumers view as salient features for each payment instrument and to see how
these perceptions affect payment use. For the purposes of this paper, we are primarily
interested in the consumers perceptions of debit cards and credit cards.
We use responses to the above perception questions to generate six binary variables
9

that are equal to 1 if the respondent answered Yes, and 0 if the respondent answered
No; these variables are: Easy, Acceptable, Safe, Control, Budgeting, and Refund.
Further, we generate binary variables that are equal to 1 if the survey respondent
answered positively in the case of debit and negatively in the case of creditthat is,
they show whether or not the respondent perceives a clear difference between debit
and credit, and perceives debit as superior. The following six variables are used in
our analysis of perceptions: DebitBetterEasy, DebitBetterAcceptable, DebitBetterSafe,
DebitBetterControl, DebitBetterBudgeting, and DebitBetterRefund.
Table 3 shows summary statistics of these variables, broken down by revolving behavior, for individuals with non-missing socio-demographic characteristics. Individuals
with revolving balances are significantly less likely to see debit as superior to credit
with respect to ease of use and acceptability, significantly more likely to see debit as
being better with respect to control over money and budgeting, and to see no significant
difference between the two payment methods for safety and ease of refunds.
The t-tests presented in Table 3 indicate that individuals with revolving balances
are significantly more likely to view debit as better than credit in terms of budgeting
and control over money. These may be key perceptual differences associated with
revolvers substitution of debit for credit.
In the next section, we further explore differences in payment behavior associated
with revolving balances, controlling for socio-demographic characteristics and participation in rewards programs. We also study how perceptions are related to revolving
behavior, controlling for socio-demographic characteristics and rewards program participation.

4
4.1
4.1.1

Results
Revolving Balances and Payment Behavior
Revolving Balances and Fraction of Payments

Both behavioral and traditional approaches to revolving credit card debt suggest that
individuals who carry a balance on their credit cards should be more likely, all else being
equal, to substitute away from credit cards and into alternative payment methods for
purchases. We would expect revolving balances to be associated with a lower fraction
10

of credit card payments and a higher fraction of debit, check, and cash payments. In
Table 4 we present ordinary least squares regressions of the following form, with robust
standard errors:
F ractionij = 0 + 1 RevolvingBalancesi + xi + i .

(2)

F ractionij is the fraction of payments made by consumer i, using payment j.

RevolvingBalancesi is a binary variable taking the value 1 if an individual regularly
carries a credit card balance and 0 otherwise. xi is a vector of socio-demographic and
other characteristics of consumer i, which varies with specification but always includes
categorical variables for gender, age group, income group, race, education, and a continuous variable for the length of time in years that an individual has held his or her
current checking account. The socio-demographic variables are defined as shown in
Table 1. Extended results of these regressions are displayed in Table 5.
In Columns 1 and 2 of Table 4 we present regressions with FractionCredit as the
dependent variable. In the initial specification of Column 1, we find, controlling for
socio-demographics, that having revolving credit card balances is associated with a
significant reduction in the fraction of payments for which credit cards are used. In
Column 2, we additionally control for participation in credit and debit card rewards
programs.6 Some of the demographic characteristics and the presence or absence of
rewards program participation are important determinants of the fraction of payments
for which credit cards are used. Across specifications, we find that revolving balances
are associated with a reduction of between 2 and 4 percent in the fraction of payments
for which credit cards are used.
In Columns 3 and 4 of Table 4 we present regressions with FractionDebit as the dependent variable. Socio-demographic characteristics, along with rewards program participation, have strong effects on the fraction of payments for which debit is used. We
find evidence for substitution into debit cards by individuals with revolving balances.
Controlling for socio-demographic characteristics and rewards program participation,
we find that revolving balances are associated with an increase of 4 to 5 percent in the
fraction of payments made by debit card.
It seems that, for individuals with revolving balances, the reduction in credit card
6

Although rewards program participation may be endogenous, including it in the regression does
not change our results.

11

payments is almost entirely offset by additional debit card payments. In Columns 5

and 6 of Table 4 we present regressions with FractionCash as the dependent variable.
We find no significant increases associated with revolving balances in the fraction of
payments for which cash is used. If anything, the implication is that revolvers use cash
for a smaller fraction of payments than do convenience users. In Columns 7 and 8 of
Table 4, we present regressions with FractionCheck as the dependent variable. We also
find no impact of revolving balances on the fraction of payments for which checks are
used.
4.1.2

Revolving Balances and Most Frequently Used Payment

Evidence of substitution from credit cards to debit cards for payments is further supported when we examine the payment instrument individuals cite as the one most
frequently used at the point of sale. In Table 6 we present results from logistic regressions with robust standard errors of the following form:
M ostF requentij = 0 + 1 RevolvingBalancesi + xi + i .

(3)

M ostF requentij is a dummy variable equal to 1 if consumer i reports using payment j most frequently. As before, RevolvingBalancesi is a binary variable indicating
whether an individual regularly carries a credit card balance, and xi is a vector of
socio-demographic and other characteristics of consumer i. Extended results of these
regressions are displayed in Table 7.
The results in Table 6 largely confirm the evidence presented in Table 4. Individuals
with revolving balances are significantly less likely to cite credit card as the payment
instrument most frequently used at the point of sale, controlling for socio-demographic
characteristics and rewards program participation. The calculated odds ratio indicates
that revolvers are around half as likely as convenience users to use credit cards most
frequently.
Individuals with revolving balances are, however, significantly more likely than
convenience users to cite debit card as the payment instrument most frequently used.
Calculated odds ratios indicate that revolvers are nearly one-and-a-half times more
likely to use debit cards most frequently. There is no apparent difference between
the two groups in the likelihood of citing cash as the most frequently used payment
instrument. Revolvers are more likely to cite check as their most frequently used
12

payment instrument, although this effect becomes insignificant after controlling for
credit card and debit card rewards.

4.2

Revolving Balances and Qualitative Perceptions

While we find strong evidence in support of substitution from credit cards to debit
cards for individuals who regularly carry revolving balances, the finding provides little
insight into the reasons for the substitution. That is, we do not know whether the
substitution is carried out because individuals with revolving balances seek to curb
their spending (according to the behavioral theory), to avoid financing costs (according
to the traditional neoclassical theory), or for some other reason not captured in our
data.
The survey asks a series of qualitative questions related to perceptions about individual payments. The literature has supported the view that attribute perceptions are
strongly associated with payment behavior (for evidence and discussions see Hirschman
1982; Miyazaki and Fernandez 2001; Mantel 2000; Jonker 2005; Schuh and Stavins
2008).
Given that perceptions are important factors in payment behavior, we are interested
in the following question: Which payment attributes do consumers with revolving
balances perceive as different between debit and credit in a manner that may influence
their payment substitution? This question is important, as it may provide support for
either the traditional view, the behavioral view, or neither.
The results shown in Table 3 indicate that budgeting and control over money may
be the key differences in revolvers perceptions associated with their substitution from
credit to debit. This view is supported by regression results. In Table 8 we present
results from logistic regressions with robust standard errors of the following form:
DebitBetterij = 0 + 1 RevolvingBalancesi + xi + i .

(4)

DebitBetterij is a dummy variable that equals 1 if consumer i approves of debit

cards but not credit cards for that specific perception j. RevolvingBalancesi is a binary
variable taking the value 1 if an individual regularly carries a credit card balance and 0
otherwise. x is a vector of socio-demographic characteristics and variables for rewards
program participation. Extended results of these regressions are displayed in Table 9.
13

Individuals with revolving balances are significantly less likely than convenience
users to indicate that debit is better than credit when it comes to ease, acceptability,
and refunds. We would expect such differences to increase the use of credit, not decrease
it as seen in the data. Revolvers are significantly more likely to indicate that debit is
better than credit in terms of budgeting and control. We argue that these perceptions
of superior budgeting and control over money may be the key factors in revolvers
substitution from credit to debit. Even though revolvers are less likely to perceive debit
as easier to use than credit, they use it more frequently because of the importance to
them of budgeting and control over money.
Given the nature of the data and the fact that the questions are open to individual
interpretation, it is difficult to parse behavioral and traditional views from perception
responses. Budgeting and control over money could be interpreted traditionally as
avoiding finance charges, or behaviorally as imposing self-control. We cannot determine
whether these results support the behavioral or traditional view of credit card debt,
although the behavioral approach is consistent with our findings. Importantly, however,
we do not find support for there being another reason why having revolving balances
is associated with substitution of debit for credit.
Although previous research has found that individuals with revolving balances are
more likely than convenience users to adopt debit cards, there are critical differences
between adoption and use. We find that individuals with revolving credit balances are
also more likely to use debit than credit for point-of-sale purchases. We argue that this
substitution is associated with a perception on the part of credit card revolvers that
debit cards can help them to budget better and have more control over their money.

Conclusion

Approximately half of credit card holders in the United States regularly carry unpaid
credit card debt. These so-called revolvers exhibit different payment behavior from
those who repay their credit card balances every month. Previous research has found
that individuals with revolving balances are more likely to adopt debit cards, but so
far there have been no empirical studies exploring the relationship between credit card
revolving and payment use patterns, such as substitution away from credit cards to
other payment methods.

14

Using data collected in the 2005 Survey of Consumer Payment Preferences, we

explore the relationship between revolving credit card balances and payment use. We
find that credit card revolvers are significantly more likely to use debit and less likely to
use credit, as compared with convenience users who repay their balances each month.
We find no significant differences in the use of check or cash between the two groups.
The two groups also differ in their perceptions of paymentsrevolvers are significantly
less likely to view debit as superior with respect to ease of use and acceptability, but
more likely to see debit as better with respect to control over money and budgeting.
The findings suggest that revolvers not only adopt, but also use, debit more frequently
than convenience users do, in order to control their spending.

15

References
Anguelov, C. E., M. A. Hilgert, and J. M. Hogarth. 2004. U.S. Consumers and Electronic Banking, 1995-2003. Federal Reserve Bulletin, Winter, pp. 118.
Ausubel, L. 1991. The Failure of Competition in the Credit Card Market. The American Economic Review 81:5081.
Ausubel, L., and H. Shui. 2005. Time Inconsistency in the Credit Card Market.
Mimeo.
Bar-Gill, O. 2004. Seduction by Plastic. Northwestern University Law Review
98:13741434.
Brito, D., and P. Hartley. 1995. Consumer Rationality and Credit Cards. Journal of
Political Economy 103:400433.
Bucks, B., A. Kennickell, and K. Moore. 2006. Recent Changes in .S. Family Finances:
Evidence from the 2001 and 2004 Survey of Consumer Finances. Federal Reserve
Bulletin 92:A1A38.
Calem, P., M. Gordy, and L. Mester. 2005. Switching Costs and Adverse Selection in
the Market for Credit Cards: New Evidence. Mimeo.
Calem, P., and L. Mester. 1995. Consumer Behavior and the Stickiness of Credit Card
Interest Rates. American Economic Review 85:13271336.
Ching, A., and F. Hayashi. 2006. Payment Card Rewards Programs and Consumer
Payment Choice. Mimeo.
Domowitz, I., and R. Sartain. 1999. Determinants of the Consumer Bankruptcy Decision. Journal of Finance 54:403420.
Gross, D., and N. S. Souleles. 2002. Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data. Quarterly Journal
of Economics 117:149185.
Hirschman, E. 1982. Consumer Payment Systems: The Relationship of Attribute
Structure to Preference and Usage. Journal of Business 55:531545.

16

Jonker, N. 2005. Payment Instrument as Perceived by Consumers A Public Survey.

Mimeo.
Klee, E. C. 2006. Families Use of Payment Instruments During a Decade of Change
in the U.S. Payment System. Board of Governors of the Federal Reserve System.
Finance and Economics Discussion Series 2006-01.
Laibson, D., A. Repetto, and J. Tobacman. 2000. A Debt Puzzle. Mimeo.
Mantel, B. 2000. Why Do Consumers Pay Bills Electronically? An Empirical Analysis. Federal Reserve Bank of Chicago Economic Perspectives 25:3248.
Meier, S., and C. Sprenger. 2007. Impatience and Credit Behavior: Evidence from a
Field Experiment. Working paper No. 07-3, Federal Reserve Bank of Boston.
Mester, L. J. 2003. Changes in the Use of Electronic Means of Payment: 1995-2001.
Federal Reserve Bank of Philadelphia Business Review Q3:1820.
Miyazaki, A., and A. Fernandez. 2001. Consumer Perceptions of Privacy and Security
Risks for Online Shopping. The Journal of Consumer Affairs 35:2744.
Prelec, D., and G. Lowenstein. 1998. The Red and the Black: Mental Accounting of
Savings and Debt. Marketing Science 17:428.
Schuh, S., and J. Stavins. 2008. To Check or Not to Check: Why Are (Some) Consumers (Finally) Writing Fewer Checks? Mimeo.
Stavins, J. 2000. Credit Card Borrowing, Delinquency and Personal Bankruptcy.
New England Economic Review , July, pp. 1530.
. 2001. Effect of Consumer Characteristics on the use of Payment Instruments.
Federal Reserve Bank of Boston New England Economic Review 3Q:1931.
Telyukova, I., and R. Wright. 2005. A Model of Money and Credit with Application
to the Credit Card Debt Puzzle. Mimeo.
Thaler, R. 1999. Mental Accounting Matters. Journal of Behavioral Decision Making
12:183206.
White, M. 2007. Bankruptcy Reform and Credit Cards. Journal of Economic Perspectives 21(4):175199.
17

Zinman, J. 2007a. Debit or Credit? Mimeo.

. 2007b. Household Borrowing High and Lending Low Under No-Arbitrage.
Mimeo.

18

Table 1: Demographic Variable Means by Credit Card Revolving Behavior

Variable

Revolving Balances (=1)

Male
Age
Over 65 yrs
55-64 yrs
45-54 yrs
35-44 yrs
25-34 yrs
18-24 yrs
Race
Other
Hispanic
White
Asian
Black
Income
>$150K
$100-$149K
$60-$99K
$40-$59K
$20-$39K
<$20K
Education
Grad. School
College
Some College
High School
Some HS
Addl Cntrls
Check Account Years

Total
N = 1880

Convenience Users
N = 1073

.429
.509

0
.513

1
.503

.684

.099
.211
.177
.245
.204
.063

.116
.231
.176
.219
.186
.072

.078
.183
.178
.280
.228
.052

.007
.012
.897
.002
.027
.082

.044
.069
.702
.064
.122

.048
.063
.706
.065
.116

.038
.076
.695
.062
.129

.294
.300
.598
.774
.417

.031
.096
.277
.248
.246
.102

.035
.097
.257
.250
.248
.113

.025
.094
.304
.245
.244
.088

.187
.841
.026
.826
.850
.079

.141
.310
.380
.157
.011

.150
.313
.376
.148
.013

.130
.306
.387
.169
.009

.220
.743
.626
.230
.372

11.5

11.6

11.4

.604

19

Revolvers
p-value
N = 807 from t-test

Table 2: Average Payment Method Use by Credit Card Revolving Behavior

Variable

Total
N = 1880

Convenience Users
N = 1073

Revolvers
p-value
N = 807 from t-test

Fraction of Payments
Made at Point of Sale
Credit Card
Debit Card
Cash
Check

.213
.363
.308
.116

.233
.338
.316
.113

.186
.397
.298
.119

.000
.000
.087
.418

Fraction Citing
Payment Type as Most
Frequently Used at
Point of Sale
Credit Card
Debit Card
Cash
Check

.237
.388
.324
.052

.277
.341
.339
.043

.183
.450
.304
.063

.000
.000
.102
.049

Table 3: Fraction of Consumers Reporting Debit Better than Credit

Variable
Debit Better than
Credit for...
Easy
Acceptability
Safe
Control
Budget
Refund

Total
Convenience Users
N = 1722
N = 964

.167
.171
.278
.631
.442
.146

.200
.186
.275
.598
.405
.158

20

Revolvers
N = 758

p-value
from t-test

.125
.152
.281
.674
.489
.131

.000
.063
.779
.001
.000
.114

21
1880
0.121

N
R-Squared

1722
0.214

Yes
Yes
1880
0.086

Yes
No
1722
0.126

Yes
Yes

-0.024*** 0.051*** 0.037***

(0.009)
(0.012)
(0.012)
0.148*** 0.427*** 0.458***
(0.016)
(0.023)
(0.023)

Fraction Debit
(3)
(4)

1880
0.062

Yes
No

-0.016
(0.010)
0.270***
(0.018)

1722
0.065

Yes
Yes

-0.016
(0.010)
0.269***
(0.018)

Fraction Cash
(5)
(6)

1880
0.070

Yes
No

0.006
(0.007)
0.126***
(0.013)

1722
0.072

Yes
Yes

0.003
(0.007)
0.124***
(0.013)

Fraction Check
(7)
(8)

Notes: Robust standard errors in parentheses. Dependent variable: fraction of payments made with credit card (Columns 1 and 2),
debit card (Columns 3 and 4), cash (Columns 5 and 6) and check (Columns 7 and 8).
Level of significance: * p <0.1, ** p <0.05, *** p <0.01

Yes
No

Socio-Demographics
Rewards Participation

Revolving Balances (= 1) -0.041***

(0.010)
Constant
0.177***
(0.018)

Fraction Credit
(1)
(2)

Ordinary Least Squares Regressions

Table 4: Payment Use and Revolving Balances

Table 5: Payment Use and Revolving Balances: Ordinary Least Squares Regressions
Fraction Credit
(1)
(2)

Fraction Debit
(3)
(4)

Fraction Cash
(5)
(6)

Fraction Check
(7)
(8)

Revolving
Balances (=1)
Male
Age
Over 65 yrs
55-64 yrs
45-54 yrs
35-44 yrs
25-34 yrs
18-24 yrs
Race
Other
Hispanic
White
Asian
Black
Income
>$150K
$100-$149K
$60-$99K
$40-$59K
$20-$39K
<$20K
Education
Grad. School
College
Some College
High School
Some HS
Addl Cntrls
Chk. Acct. Yrs.
Cred. Rewards
Deb. Rewards
Constant
N
R-Squared

-0.041***

-0.024***

0.051***

0.037***

-0.016

-0.016

0.006

0.003

0.010

0.010

-0.047***

-0.044***

0.069***

0.066***

-0.031***

-0.032***

0.064***

0.036*

-0.071***

-0.050**

-0.020

-0.021

0.027*

0.036**

-0.026
-0.010
0.004
0.003

-0.021
-0.016
-0.006
0.002

0.006
0.018
0.044**
0.016

0.006
0.022
0.048**
0.012

0.028*
-0.008
-0.012
0.030

0.020
-0.011
-0.014
0.025

-0.008
-0.000
-0.036***
-0.048***

-0.006
0.005
-0.028**
-0.038***

-0.045**
0.002

-0.026
0.016

0.059**
0.019

0.045
-0.006

0.008
-0.003

0.004
0.005

-0.022
-0.018

-0.022
-0.015

0.122***
-0.055***

0.126***
-0.031**

-0.119***
0.013

-0.121***
-0.015

-0.006
0.072***

-0.001
0.070***

0.002
-0.030***

-0.004
-0.024***

0.116***
0.093***
0.034**
0.002

0.054
0.067***
0.018
-0.003

-0.068*
-0.053**
-0.016
-0.001

-0.030
-0.037
-0.005
0.012

-0.007
-0.027
-0.020
-0.008

0.008
-0.022
-0.016
-0.014

-0.041**
-0.013
0.002
0.007

-0.032*
-0.008
0.003
0.005

-0.001

0.020

-0.058**

-0.068***

0.053**

0.044**

0.007

0.004

0.106***
0.040***

0.076***
0.023*

-0.076***
-0.015

-0.062***
-0.011

-0.023
-0.024**

-0.017
-0.016

-0.007
-0.001

0.002
0.004

-0.018
-0.047

-0.016
-0.023

-0.046**
0.047

-0.048***
0.002

0.035**
0.042

0.038**
0.057

0.028**
-0.041*

0.026**
-0.037*

0.000

-0.002***

0.270***

0.001
-0.020*
-0.019
0.269***

0.001***

0.427***

-0.001**
-0.127***
0.124***
0.458***

0.001

0.177***

-0.000
0.165***
-0.092***
0.148***

0.126***

0.001***
-0.019**
-0.014*
0.124***

1880
0.121

1722
0.214

1880
0.086

1722
0.126

1880
0.062

1722
0.065

1880
0.070

1722
0.072

Notes: Robust standard errors in parentheses. Dependent variable: fraction of payments made with credit card
(Columns 1 and 2), debit card (Columns 3 and 4), cash (Columns 5 and 6) and check (Columns 7 and 8).
Level of significance: * p <0.1, ** p <0.05, *** p <0.01

22

23
1880
0.115

N
Pseudo R-Squared

1722
0.187

Yes
Yes

-0.413***
(0.138)
-2.373***
(0.244)

1880
0.056

Yes
No

0.419***
(0.100)
-0.259
(0.180)

1722
0.064

Yes
Yes

0.356***
(0.104)
-0.144
(0.187)

1880
0.050

Yes
No

-0.158
(0.105)
-0.634***
(0.181)

1722
0.069

Yes
Yes

-0.164
(0.112)
-0.457**
(0.193)

1880
0.077

Yes
No

0.454**
(0.216)
-2.401***
(0.352)

1722
0.081

Yes
Yes

0.282
(0.231)
-2.607***
(0.411)

Most Frequent Cash Most Frequent Check

(5)
(6)
(7)
(8)

Notes: Robust standard errors in parentheses.

Columns 1 and 2: dependent variable = 1 if credit card is cited as most frequently used payment instrument at point of sale. Columns 3 and
4: dependent variable = 1 if debit card is cited as most frequently used payment instrument at point of sale. Columns 5 and 6: dependent
variable = 1 if cash is cited as most frequently used payment instrument at point of sale. Columns 7 and 8: dependent variable = 1 if check
is cited as most frequently used payment instrument at point of sale.
Level of significance: * p <0.1, ** p <0.05, *** p <0.01

Yes
No

Socio-Demographics
Rewards Participation

Revolving Balances (= 1) -0.535***

(0.124)
Constant
-1.903***
(0.216)

Most Frequent Credit Most Frequent Debit

(1)
(2)
(3)
(4)

Logit Regressions

Table 6: Most Frequent Use and Revolving Balances

Table 7: Most Frequent Use and Revolving Balances

Revolving
Balances (=1)
Male
Age
Over 65 yrs
55-64 yrs
45-54 yrs
35-44 yrs
25-34 yrs
18-24 yrs
Race
Other
Hispanic
White
Asian
Black
Income
>$150K
$100-$149K
$60-$99K
$40-$59K
$20-$39K
<$20K
Education
Grad. School
College
Some College
High School
Some HS
Addl Cntrls
Chk. Acct. Yrs.
Cred. Rewards
Deb. Rewards
Constant
N
Pseudo
R-Squared

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

-0.535***

-0.413***

0.419***

0.356***

-0.158

-0.164

0.454**

0.282

0.308**

0.338**

-0.332***

-0.320***

0.298***

0.311***

-0.733***

-0.925***

0.467**

0.372

-0.402*

-0.271

-0.065

-0.090

0.084

0.161

-0.268
-0.051
-0.019
0.200

-0.330
-0.166
-0.158
0.187

0.128
0.259*
0.524***
0.172

0.141
0.271*
0.557***
0.171

0.171
-0.196
-0.365**
-0.060

0.092
-0.193
-0.416**
-0.094

-0.418
-0.120
-1.169***
-1.888*

-0.216
-0.021
-0.876**
-1.622

-0.448
-0.012

-0.374
0.330

0.292
0.189

0.222
0.087

0.107
-0.072

0.084
-0.210

-0.709
-1.042

-0.551
-0.848

1.316***
-0.687***

1.459***
-0.430*

-1.343***
-0.165

-1.383***
-0.285*

-0.174
0.679***

-0.082
0.633***

-0.589
-0.572

-0.405
-0.424

1.105***
0.858***
0.524***
0.195

0.548
0.654***
0.403**
0.177

-0.113
-0.099
0.090
0.110

0.102
-0.044
0.159
0.180

-0.879**
-0.478**
-0.393***
-0.194

-0.544
-0.385*
-0.419***
-0.262*

-0.641
-0.630
-0.348
-0.111

-0.783
-0.299
-0.120
-0.034

0.115

0.432*

-0.391**

-0.425**

0.301*

0.128

-0.130

0.074

0.962***
0.527***

0.775***
0.423***

-0.442***
-0.126

-0.388**
-0.093

-0.551***
-0.296**

-0.475**
-0.269*

0.514
0.148

0.848**
0.340

-0.298
-0.798

-0.305
-0.667

-0.454***
0.030

-0.475***
-0.184

0.418***
0.260

0.448***
0.336

0.579**
0.543

0.632*
0.605

0.008

-0.014**

-0.634***

0.006
-0.782***
0.013
-0.457**

-0.001

-0.259

-0.010
-0.595***
0.664***
-0.144

0.008

-1.903***

0.006
1.662***
-0.776***
-2.373***

-2.401***

0.002
-0.609*
-0.122
-2.607***

1880

1722

1880

1722

1880

1722

1880

1722

0.115

0.187

0.056

0.064

0.050

0.069

0.077

0.081

Notes: Columns 1 and 2: dependent variable = 1 if credit card is cited as most frequently used at point of sale.
Columns 3 and 4: dependent variable = 1 if debit card is cited as most frequently used at point of sale.
Columns 5 and 6: dependent variable = 1 if cash is cited as most frequently used at point of sale.
Columns 7 and 8: dependent variable = 1 if check is cited as most frequently used at point of sale.
Level of significance: * p <0.1, ** p <0.05, *** p <0.01

24

25
1722
0.073

N
Pseudo R-Squared

1722
0.042

Yes
Yes

-0.279**
(0.135)
-0.943***
(0.236)

Acceptability
(2)

Control
(4)

1722
0.055

Yes
Yes
1722
0.057

Yes
Yes

-0.001 0.307***
(0.114) (0.107)
-0.140 1.111***
(0.200) (0.192)

Safety
(3)

1722
0.045

Yes
Yes

0.336***
(0.102)
0.398**
(0.185)

Budgeting
(5)

1722
0.068

Yes
Yes

-0.263*
(0.145)
-0.943***
(0.253)

Refunds
(6)

Notes: Robust standard errors in parentheses.

Dependent variable =1 if individual responded positively for debit cards and negatively for credit cards; zero otherwise.
Level of significance: * p <0.1, ** p <0.05, *** p <0.01

Yes
Yes

-0.623***
(0.141)
-0.767***
(0.244)

Ease
(1)

Socio-Demographics
Rewards Participation

Constant

Revolving Balances (= 1)

Debit Better than Credit for:

Logit Regressions

Table 8: Perceptions and Revolving Balances

Table 9: Perceptions and Revolving Balances

Revolving
Balances (=1)
Male
Age
Over 65 yrs
55-64 yrs
45-54 yrs
35-44 yrs
25-34 yrs
18-24 yrs
Race
Other
Hispanic
White
Asian
Black
Income
>$150K
$100-$149K
$60-$99K
$40-$59K
$20-$39K
<$20K
Education
Grad. School
College
Some College
High School
Some HS
Addl Cntrls
Chk. Acct. Yrs.
Cred. Rewards
Deb. Rewards
Constant
N
Pseudo R-Squared

(1)

(2)

(3)

(4)

(5)

(6)

-0.623***

-0.279**

-0.001

0.307***

0.336***

-0.263*

-0.357***

-0.278**

-0.080

-0.302*** -0.337***

-0.390*** -0.450***

-0.088

-0.475**

-0.378*

-0.448**

-0.908***

-0.057
0.261
0.019
-0.103

0.137
0.095
-0.078
-0.363

-0.060
-0.114
-0.160
-0.541*

-0.004
0.012
0.125
-0.307

-0.191
-0.192
-0.208
-0.518**

-0.421*
-0.017
0.009
-0.177

0.104
-0.333

0.238
-0.790**

0.441*
-0.183

-0.020
-0.347

-0.038
-0.673***

0.456
-0.332

-0.586
-0.277

-0.643*
-0.756***

-0.561**
-0.061

-0.388
-0.162

0.345
-0.753**
-0.324*
-0.071

-0.095
-0.447
-0.062
0.074

-0.039
-0.832***
-0.201
-0.061

-0.275
-0.394*
-0.079
0.039

-0.043
-0.068
-0.049
0.203

-0.158
-0.747**
-0.237
-0.063

-0.555**

-0.421*

-0.365*

-0.527***

-0.293

-0.283

-0.232
-0.164

-0.307
-0.194

-0.238
-0.186

-0.379**
-0.046

-0.284*
0.038

-0.184
0.070

0.252
1.301***

0.209
0.893*

0.023
0.917**

-0.090
0.968

-0.278*
0.191

0.372*
1.167**

0.001
-0.003
-1.191*** -0.485***
0.599***
0.266
-0.767*** -0.943***
1722
0.073

1722
0.042

-0.846*** -0.876***
0.035
-0.043

-0.015**
-0.002
-0.751*** -0.744***
0.708***
0.266*
-0.140
1.111***
1722
0.055

1722
0.057

-0.016**
-0.008
-0.480*** -1.154***
0.594*** 0.684***
0.398** -0.943***
1722
0.045

1722
0.068

Notes: Dependent variable =1 if individual responded positively for debit cards and negatively for credit
cards; zero otherwise. Column 1 is ease, column 2 is acceptability, column 3 is safety, column 4 is control,
column 5 is budgeting, and column 6 is refunds.
Level of significance: * p <0.1, ** p <0.05, *** p <0.01

26

Table 10: Fraction of Consumers with Credit and Debit Card Rewards
Variable

Total
Non-Revolvers
N = 1722
N = 964

Credit Card Rewards

Debit Card Rewards

.305
.146

Revolvers
p-value
N = 758 from t-test

.303
.122

.309
.175

.796
.002

Table 11: Fraction of Consumers with Payment Perceptions

Variable
Credit Card
Easy
Acceptability
Safe
Control
Budget
Refund
Debit Card
Easy
Acceptability
Safe
Control
Budget
Refund
Cash
Easy
Acceptability
Safe
Control
Budget
Refund
Check
Easy
Acceptability
Safe
Control
Budget
Refund

Total
Non-Revolvers
N = 1880
N = 1073

Revolvers
N = 807

p-value
from t-test

.740
.580
.398
.298
.179
.655

.698
.555
.401
.324
.207
.625

.796
.612
.395
.263
.143
.694

.000
.014
.811
.004
.000
.002

.723
.506
.482
.851
.504
.493

.671
.486
.452
.829
.473
.451

.792
.533
.523
.880
.545
.549

.000
.042
.002
.002
.002
.000

.894
.765
.552
.662
.604
.567

.887
.772
.548
.646
.594
.562

.902
.757
.558
.684
.618
.574

.301
.462
.678
.083
.279
.611

.269
.072
.225
.384
.303
.171

.259
.075
.22
.365
.285
.185

.283
.068
.229
.409
.326
.152

.257
.595
.703
.054
.057
.067

27

Appendix: Construction of Perceptions Variables

The SCPP asks respondents to fill in a grid below to indicate their perceptions
of each payment instrument. The respondents can check as many cells as they want
to show whether they agree with a given statement. The grid is introduced as follows:
Please select all the methods of payment for in-store purchases that you believe
fit the following descriptions: (You may select more than one in each row.)

Cash

Paper

Credit

Debit Card;

Debit Card;

Gift/

Check

Card

enter PIN

sign receipt

Prepaid Card

1) Is convenient
2) Is easy to use
3) Is preferred by
stores/sales people
4) Keeps my money/accounts
safe
5) Money leaves my
account right away
6) Helps me budget/spend
within my means
7) Gives me control
over my money
8) Is easy to get a refund
for returned items/disputes

It is not required that an individual respondent be a user of a particular instrument

for him/her to register his/her perceptions. In order to develop the variables for each
payment instrument we used the following mapping:
a) Yes for the first and second perceptions map into a dummy variable, easy
to use.
28

b) Yes for the third perception maps into a dummy variable, widely acceptable.
c) Yes for the fourth perception maps into a dummy variable, safe.
d) Yes for the fifth and seventh perceptions map into a dummy variable, allowing
control over money.
e) Yes for the sixth perception maps into a dummy variable, helping in budgeting.
f) Yes for the eighth perception maps into a dummy variable, easy to get refunds.

29