Chicago Booth Review Podcast Could Using Credit Cards More Save You Money?

Abigail Sussman: And here what we do is we just encourage people to think about relying more on their credit cards, for example, and think about different reasons why it's actually okay and in some cases good. What are some of the benefits of using credit cards? And then we ask people to make a decision where they're repaying they have the option to essentially repay some of their outstanding credit card debt.

Hal Weitzman: Do you have both a credit card balance and a savings account? Would you use your savings to pay down your credit card balance if it would save you money on fees? Welcome to the Chicago Booth Review Podcast, where we bring you groundbreaking academic research in a clear and straightforward way. I'm Hal Weitzman. Chicago Booth's Abigail Sussman has conducted research that suggests that about one in five people holds a credit card balance and a savings account, which effectively means that they are paying to borrow their own money. What would it take to change their behavior? Abby Sussman, welcome to the Chicago Booth Review Podcast.

Abigail Sussman: Thanks so much for having me.

Hal Weitzman: We're delighted to have you here to talk about your research on co-holding. What is co-holding?

Abigail Sussman: Yes. So this is research that I've been doing that's been led by a wonderful collaborator, Raphael Batista, who's now a postdoc at Princeton and just finished up a PhD here at Chicago. And in this project, we're looking at co-holding, which is a behavior where people are simultaneously holding large amounts of savings in liquid savings accounts. And at the same time, they're borrowing money in the form of high-interest things like credit card debt. And here they're borrowing at a high cost from the bank and they're lending back to the bank at a low cost. And so we see this as a puzzle because essentially people could be using some of their savings balance to repay the credit card debt and save money in the process.

Hal Weitzman: Right. So the opposite of arbitrage.

Abigail Sussman: It's the opposite, yes.

Hal Weitzman: You're lending low and borrowing high. Yes.

Abigail Sussman: Exactly.

Hal Weitzman: So that obviously rationally you wouldn't do that.

Abigail Sussman: Exactly.

Hal Weitzman: You would do the opposite if you'd do anything, but you would assume that if people have cash and they're not doing anything with it that they would pay off their debts. So the question is, why aren't they doing that? Basically, the way you describe it, which I love, is that people are effectively paying to borrow their own money.

Abigail Sussman: Yes, that's correct. And so there are a variety of different reasons that have been proposed within the econ literature. Most of it is trying to really rationalize this behavior through things like self-control mechanisms, for example. And in our project, I think there are a couple of different angles that we take to it. Partly we try to understand, is some of this behavior driven just by inattention? Do people not realize that they're doing it? We don't find evidence for that. What we really turn to much more instead is the idea that people see value in maintaining savings balance so much so that they're willing to incur a cost through credit card debt.

Hal Weitzman: Yeah. In a sense, I understand it because you're always told standard homespun financial advice is the first thing you want to do when you have any money is build a little savings buffer. So I understand why you would have that. Even if you had massive debts, you would say to someone you want to have whatever the amount people usually say, $1,000 or whatever, just in case something even worse happens-

Yes.

Abigail Sussman: ... than what's already happened. So it's not crazy, right?

I think it's not crazy. I think it's very consistent with a lot of rules of thumb. And so I think one of the big questions is, in some sense, what is the right buffer? And so you could take the perspective that says you could always borrow on credit. If you have the belief you couldn't later borrow on credit, then the situation changes. But if you have access to credit, then actually you shouldn't need very much of a buffer at all except for maybe some sort of daily transaction because you have access to credit at a later point. So why would you borrow now if you could borrow later and not have to pay the fee in between?

Hal Weitzman: Right. So I want to ask you about that because that will affect how you think about an emergency fund, which I'm guessing a lot of people have too much money in emergency fund. Other people, of course, have nothing. So in your research that you did with Batista, did you find how many credit card users were also doing this co-holding activity?

Abigail Sussman: Yeah. So this was work that we did with an Australian bank, and in that population, we found that about 20% of people who had credit cards were co-holding. And this is actually quite consistent. There's a little bit of a range, but that falls pretty much in the center of where other people doing research in other countries as well have found.

Hal Weitzman: Okay. So it's amazing. So one in five credit card holders is doing this.

Abigail Sussman: Yeah.

Hal Weitzman: And is it typically a short-term thing where they're just, as you say, they are busy living their lives and not worrying too much-

Abigail Sussman: Yeah.

Hal Weitzman: ... or is it something that they do over a long period of time?

Abigail Sussman: So it does seem to be a fairly persistent behavior. So in about three years of data, two out of three years, people seem to be co-holding. So there seem to be really some people who seem to be consistently doing this and others who maybe are not.

Hal Weitzman: Okay. And now, as you said, you did the research in Australia where they use debit cards. So there's a difference between debit cards, which if you're not familiar, just take the money from your bank account and credit cards where you're actually borrowing. And so you found that people's spending habits are different, or they would prefer to use these cards in different ways with different kinds of spending, right? That the small everyday purchases people would prefer generally to use the debit cards and then the bigger unexpected buyers, they want to use the credit cards. Why is that?

Abigail Sussman: Yeah. So I think just to clarify, so this was a pattern that we found among people who were co-holding-

Hal Weitzman: Okay.

Abigail Sussman: ... more than others, that among co-holders overall, there was a greater preference for using debit cards versus credit cards. So this was something as a starting point that was pretty surprising to us because what we thought was when you think about co-holding, I think the intuition is that the problem is that you have too much debt. And so it's weird that the people who have the problem of having too much debt get into this trouble potentially, or at least from a correlational perspective, are also the ones who are using their debit card, which is essentially drawing down cash more than non-co-holders who aren't in the same situation. So that was a little bit surprising to us. It was the opposite, actually, of what we had expected when we were thinking about this transaction data.

And I think part of the difference in terms of the smaller everyday expenses versus the larger expenses, as you could imagine, I have this preference for spending... using my debit card for daily transactions. For example, some of the things that we talked about earlier, it's just what I think I'm supposed to be doing. I think it's the right thing, for example, to be using my debit card for my regular grocery expenses or my cup of coffee, or that's just not what I'm supposed to be dipping into my credit for. And then you could imagine a situation where then it comes to a very large expense and I just don't have the liquidity available. And so that may not be as much of a deliberate choice as essentially just what falls out of the banking strategy.

Hal Weitzman: Okay. So they think about the daily spending, like the petty cash. There's a little tin and you take whatever, the jar, the cash jar, and you take some cash out and you spend it. But if you're going to buy a car, then you just don't have money in the cash jar, so you're going to use your credit card. Okay, so that makes more sense. But you saw that pattern more among co-holders.

Abigail Sussman: That's right.

Hal Weitzman: Okay. And so why do you think that is?

Abigail Sussman: Yeah. So I think that the reasoning that corresponds to this is essentially the idea that let's say that I am okay using my credit card on a regular basis. I don't need to maintain a cash balance because I can go to the grocery store or I can go to the coffee shop or wherever I'm going, I can take out my credit card and that's a fine way for me to make the purchase. The maintaining the cash buffer is less important in that case versus if I want to maintain the cash buffer, then I'm going to want to make sure that I do have this money in cash.

And so I'm not going to use that money, let's say, to repay the credit card debt because I'm going to need it to be available. And so I think one piece of this that's important to highlight is also that co-holding involves two behaviors. So it's both borrowing and having money in cash, but you might not be a co-holder, for example, just because you have a lot of money or because you have no money and you only have credit card debt. So it really is this combination of behaviors that leads us to be co-holding.

Hal Weitzman: And of course, like you say, we're in two months, we're doing two different activities and this opens up this whole area, which we've done a lot of work. We've covered a lot of work, academic work in Chicago with review about mental accounting, this idea that if I put $5 a week in a jar and put it on top of the fridge, then I think about that differently than the money in the bank or the money that I borrow, even though, of course, economically speaking, it's all exactly the same. So what does this tell us about mental accounting? What's going on here?

Abigail Sussman: Yeah. So I think mental accounting can take many different forms and so I think often we think about it in terms of sources and uses of funds. And so here, what we're really getting at is people treating these different types of payment methods essentially as different types of accounts and they're separating them. So if you thought of these two accounts as perfectly fungible, then you would never see co-holding behavior, but it is this tendency to treat these as really distinct psychologically, and that's how this pattern emerges. I think it's almost impossible to get to co-holding without some form of that. Although I think there are economic rationalizations, but I think that at a fundamental level, you really need to be treating these as separate pools of money.

Hal Weitzman: The great thing about that is you as a social psychologist, you can come in and manipulate that a little bit. And so you encourage people to think about it differently, right? You encourage them to use their credit cards more for these everyday purchases. So what were you trying to test there and then what happened?

Abigail Sussman: So yeah, so this is now moving into more of a lab context, so out of the field. And here what we do is we just encourage people to think about relying more on their credit cards, for example, and think about different reasons why it's actually okay and in some cases good, like what are some of the benefits of using credit cards? And then we ask people to make a decision where they're repaying, they have the option to essentially repay some of their outstanding credit card debt or use the money to put it back into savings. And what we find is that for people who are now more comfortable using their credit card, they're also more comfortable repaying their credit card balance; again, going back to this idea that you can use this as a lever that's available to you in an ongoing basis. And so it's not as critical to maintain the cash separately.

Hal Weitzman: Okay. And so in order to get to that, you just told people, you encourage them to use credit cards more and say that this can be helpful.

Abigail Sussman: That's the idea, right?

Hal Weitzman: Yeah, okay.

Abigail Sussman: So in the field data, what we have is we can observe whether you're using your credit card more or your debit card more.

Hal Weitzman: Right.

Abigail Sussman: And so here in this lab context, we're instead trying to shift people causally by saying, "We're going to explain some of the benefits of using a credit card."

Hal Weitzman: Okay. I'm guessing this is another study where you told people about co-holding, you just reinforced to them what they were doing and how it didn't make financial sense. What happened there?

Abigail Sussman: Yeah. So this was a much larger field experiment. And so here, again, with this banking partner, what we were able to do is we were actually able to identify over 100,000 co-holders in their population and we randomized different in-app notifications that we sent to them. And so this was at the start of the project where the intuition was really that some of this must be that people just don't fully realize that they're doing this. So as a psychologist, I didn't think that would explain all of it, but I thought it probably would explain some. And so we sent people these in-app notifications basically letting them know that they were co-holding in one case and that it was costly in another and then no notifications in the third condition. And we expected this to have a huge effect and we were quite surprised to learn that it had almost no effect from a substantial perspective.

And so what we find is that after sending people these notifications, we do see some differences in terms of people's likelihood of paying, let's say more than the minimum from the prior month, but we see... by one month later, we see almost no difference in terms of the balances. And so I think it was something like $19 on a $2,000 balance that people are more likely to pay when they receive these notifications than when they don't, so really not statistically significant and also not economically meaningful in terms of the changes that people are making after receiving these messages. And so for us, I think that was really interesting I think as far as null results go, because we would've expected that this gap in information plays a much bigger role when, in fact, it seems like actually even when people are made aware, it's a deliberate action and it's a deliberate strategy that people are using because of what makes them feel comfortable, essentially.

Hal Weitzman: If you're enjoying this podcast, there's another University of Chicago Podcast Network show that you should check out. It's called The Pie. Economists are always talking about The Pie, how it grows and shrinks, how it's sliced, and who gets the biggest share. Join host Tess Vigeland as she talks with leading economists about their cutting-edge research and key events of the day. Hear how the economic pie is at the heart of issues like the aftermath of a global pandemic, jobs, energy policy, and much more. Abby Sussmann, in the first half, we talked about your research on co-holding. And you shared that when you told people, when you explained to them that the co-holding wasn't perhaps financially the best idea, they essentially didn't really care. They didn't change their behavior very much, right? You mentioned something like they paid 19 more dollars a month-

Abigail Sussman: That's right.

Hal Weitzman: ... on it?

Abigail Sussman: Yeah. I think on a $2,000 balance, something like that.

Hal Weitzman: Basically was telling you to go away with your information. They don't really know. So it's interesting, do you think that most people who are doing this are aware of it? Because even when they are aware of it, they don't change. So is it conscious behavior?

Abigail Sussman: Yeah. So the null result from that field experiment suggests that a lot of this is conscious behavior. And if you ask people, I think people really do feel the need to have this savings buffer and they want it and they derive value from it. You mentioned mental accounting before as this broad principle, and I think people can use this strategy of dividing funds in many different ways. I think some of it can be almost just a way of organizing your money and thinking about when you're using which pool for what types of expenses.

And I think it's also that people have a really firm belief that they should be maintaining savings. So I actually have a different project with a collaborator, Rick O'Brien, where we look at basically people's willingness to take money from a savings account that's set aside for an intended purpose basically in order to make an emergency payment where if they don't make the payment using those savings, they'll incur credit card debt. So it's a very similar idea, also gets similar implications for co-holding.

And in that case, what we find actually is that depending on what the savings is set aside for, people will be more or less likely to withdraw money from the account. So if you have savings that set aside, let's say, for an upcoming vacation, people say, "Okay, that I can take money from for this emergency expense." But if it's something that people view as core to their personal responsibility, so I think that this money is set aside for my kids' education, I'm just not going to touch that. And does it mean that I'm going to have to incur extra interest expense for my credit card? Maybe, but I'm willing to incur that expense to make sure that I have that money set aside for this purpose.

Hal Weitzman: That is so interesting. And so just this whole project is interesting 'cause I feel like it's very contradictory to what we normally hear, which is people are too spend thrift, they don't save enough. Is that a certain type of people? And then there are other people who are too conservative and need the safety blanket and will never dip into that. I can imagine that I've got my $1,000 buffer and if it goes below a thousand, I start panicking. Are these two different types of people?

Abigail Sussman: So it's super interesting because I think actually the co-holding behavior suggests that you can have the same person that is doing both, right? So these don't necessarily have to be distinct behaviors. It's, I want to have the savings and that might mean I'm not willing to spend on anything because I need to maintain the savings, but it might also mean I'm going to still spend on things either because I want to or because I need to. Many people are financially constrained in a way that there's not that much discretion, but in order to finance the savings account, I'll just increase my credit.

Hal Weitzman: Okay. So we're all a little bit Dr. Jekyll with the safety blanket and Mr. Hyde going crazy-

Abigail Sussman: Exactly. Exactly.

Hal Weitzman: ... in Vegas or whatever.

Abigail Sussman: At least if you're co-holding.

Hal Weitzman: Right. And you said that one in five people is doing co-holding over a significant period of time. Do you think there's more people who are doing it occasionally?

Abigail Sussman: There could be, yeah, likely.

Hal Weitzman: It might be a more general mode of behavior. The other thing interesting thing about this is just that mental accounting is very strong. And as you say, it's not necessarily very coherent. I think I've heard that before, that we're in two minds perhaps about that we're the... Maybe is it that the spirit is willing, but the flesh is weak? We actually want to-

Abigail Sussman: I don't know.

Hal Weitzman: ... spend money, but we know psychologically we shouldn't so we trying to do these contradictory behaviors?

Abigail Sussman: So it doesn't strike me actually as quite as contradictory maybe in the sense that I have two separate goals. And there's a third goal, which is like, you could think of it as more of a pure economic goal, which is I want to increase my net worth over time or thinking about some expected value over my lifetime, but this is actually, they're two separate goals. One is that I want to spend and one is that I want to save. And they're actually, in some ways, when you think about it in this co-holding framework, those two goals are not in direct conflict from a psychological perspective. They are perhaps from an economic perspective over the long term, but it also depends a lot on what is the timeframe that you're considering, 'cause over the short term in a certain sense, they're actually in much less conflict, again, from this psychological perspective.

Hal Weitzman: Right. Okay. You've convinced me. I'm easily persuaded. I just wanted to hear you talk about it. So you also talk a little bit in your research about co-spending. What is co-spending?

Abigail Sussman: Yeah. So the idea here is partly to say that these two things are not as much in conflict as well. And here when we talk about co-spending, we're just referring to this notion that it's not that people, let's say, incur credit card debt and then they just leave it there and they're not spending on their credit card anymore because they have this debt or that they're not using cash, they're only using their credit card, that what we find is that a lot of people really are actively using both cash and credit in a very active way.

Hal Weitzman: Okay. But it ends up with people often frequently depositing or withdrawing money from accounts, 'cause you say they're doing these different kinds of activities. It's not a portfolio-based approach to where you're looking rationally-

Abigail Sussman: Yes.

Hal Weitzman: ... across the whole thing.

Abigail Sussman: That's exactly right.

Hal Weitzman: It relates to the two goals you talked about. All right.

Abigail Sussman: You're incurring costs.

Hal Weitzman: You're incurring costs. If you had a financial advisor, they would tell you not to do that, presumably.

Abigail Sussman: Yes.

Hal Weitzman: Okay. So talking of financial advice, what would banks, lenders, financial institutions, credit card companies, what can they do? Well, maybe not credit card companies, but what would companies that want people to behave responsibly with their money, what should they do with your research?

Abigail Sussman: Yeah. I think it's interesting, I think it really speaks first off just to the limits of information. It's not purely just explaining these are the costs and these are the benefits, that there could be some form of financial education that could be valuable in helping address these issues, but it's really much more about getting at the heart of understanding psychologically what is the security that people are gaining from having this cash buffer and are there other ways where you could maintain this feeling of security or responsibility that people have? And is that something [inaudible 00:21:16]

Hal Weitzman: You mean like saying you have access to this amount of credit if you're in trouble?

Abigail Sussman: Sure. Yes. Something like that I think could be very valuable. And I think it's very complicated because the idea that you should just encourage people to be spending on their credit card all the time obviously has other disadvantages. And so I don't think we want to go too far down that route.1 But yes, I think saying something like, "You could have access to this money if you needed it," would be something that could be effective.

Hal Weitzman: So the instinct to have a security blanket is good, but there may be that we don't necessarily need a security blanket-

Abigail Sussman: That's right.

Hal Weitzman: ... and they could help us think about that.

Abigail Sussman: That's right. And so in this other project I mentioned around these different types of savings accounts, one of the things that we do there to try to help people feel more comfortable taking money from their savings account when they really need it is that we give them, this is also in a hypothetical experiment, but we give them the opportunity to set up an automatic deposit from their weekly paycheck or from their regular paycheck to put money back in to replenish the account. And so having a plan for refilling their savings when they can actually makes people more willing to draw it down in the first place.

Hal Weitzman: Okay. So if banks understood people's psychology, they might actually be able to help them be more, I don't want to say rational, but save money, I guess, ultimately.

Abigail Sussman: Have lower interest fees, let's say.

Hal Weitzman: All right. Excellent. Abby Sussmann, thank you so much for coming on the Chicago Booth Review podcast to talk to us about co-holding.

Abigail Sussman: Great. My pleasure. Thanks so much for having me.

Hal Weitzman: That's it for this episode of the Chicago Booth Review Podcast, part of the University of Chicago Podcast Network. For more research, analysis and insights, visit our website, chicagobooth.edu/review. When you're there, sign up for our weekly newsletter so you never miss the latest in business-focused academic research. This episode was produced by Josh Stunkel. If you enjoyed it, please subscribe and please do leave us a five-star review. Until next time, I'm Hal Weitzman. Thanks for listening.