When faced with debt across multiple credit cards, do people pay down their balances in a way that makes financial sense? On February 1, BFI hosted Chicago Booth Professor Neale Mahoney for a Friedman Forum luncheon lecture on his recent working paper, “How Do Individuals Repay Their Debt? The Balance-Matching Heuristic.”
In the paper, Professor Mahoney and his colleagues examine how credit card holders in the United Kingdom divide their payments between credit card balances. Instead of paying down the card with the highest interest rate first, the authors find people make payments based on the size of the balances on each credit card. These findings reveal the large gap between the optimal way to repay debt, and reality of how people repay their credit card debt.