Sticking to Your Plan: Hyperbolic Discounting and Credit Card Debt Paydown

I use detailed data from an online financial management service to analyze the extent to which short-run impatience can explain why people hold expensive credit card balances. I first measure the sensitivity of consumption spending to paycheck receipt for each user and argue that it provides a proxy for short-run impatience. To distinguish between consumers who are aware (sophisticated) and unaware (naive) of their future impatience, I exploit the fact that the sensitivity to paycheck receipt should vary with available resources for sophisticated agents. I then relate the characteristics of each per- son’s consumption pattern to his planned and actual debt repayment behavior. Consistent with theory, planned paydown is significantly more predictive of actual paydown for sophisticated than for naive agents. In addition, higher measured impatience leads to lower debt paydown for sophisticated agents, whereas naive agents do not reduce their credit card balances substantially, irrespective of their level of impatience. These findings are inconsistent with several alternative explanations considered, such as credit constraints, and sup- port the view that short-run impatience and sophistication play a substantial role in explaining patterns of success and failure in debt paydown.