School of Economics

Self-Control, Financial Literacy and the Co-Holding Puzzle

John Gathergood and Jorg Weber

Nowadays many consumers borrow money in the form of credit cards, personal loans, or store cards. Most consumers also hold some readily accessible savings in savings accounts or investments. But some consumers borrow money and save at the same time. This is a paradox: borrowing is in nearly all cases more expensive than saving, so these consumers could save money by simply taking their savings and investments and using that money to pay-down their credit and debt. Why don’t they? This is a puzzle which economists have noticed in the last ten years. One reason for holding savings and debt at the same time could be that the consumer is about to use the savings for a purchase or to pay a tax bill. Another reason is that the consumer has just forgotten that they have savings as well as debt. A different explanation is that consumers might deliberately plan to hold debt and not pay it down with their savings because they know that, if they did, they would be tempted to borrow more.

In this Nottingham School of Economics working paper, in the Journal of Economic Behavior and Organisation, John Gathergood and Jörg Weber use UK survey data to analyse the puzzling co-existence of high cost revolving consumer credit alongside low yield liquid savings in household balance sheets, which we name the ‘co-holding puzzle’. Approximately 12% of households in the data sample co-hold, on average, £3800 of revolving consumer credit on which they incur interest charges, even though they could immediately pay down all this debt using their liquid assets. Co-holders are typically more financially literate, with above average income and education. In most estimates co-holding is also associated with impulsive spending behaviour on the part of the household. Results provide empirical support to theoretical models in which households co-hold as a means of managing self-control problems.

Journal of Economic Behavior and Organisation, "Self-Control, Financial Literacy and the Co-Holding Puzzle" by John Gathergood and Jorg Weber.


View all featured publications

Posted on Wednesday 22nd July 2015

School of Economics

Sir Clive Granger Building
University of Nottingham
University Park
Nottingham, NG7 2RD

Contact us