Why do Households Use Credit Cards?

, Singh Family Professor of Finance

U.S. households hold over $1 trillion in credit card debt and pay an average interest rate of 22% on this debt. In standard models of intertemporal optimization households should only borrow at this rate if they expect their income to rise sharply in the future. This project tests whether this basic justification for credit card usage holds in the data. In preliminary work, we find that it does not. This finding has implications for regulatory policy and for models of household behavior.