| In this research, we offer a model to explain why people use revolving credit. By revolving credit, we mean maintaining outstanding balances that are not paid off in their entirety every month, thereby incurring finance charges. This model is behavioral, and uses a mental accounting framework (Thaler 1985) to explain revolving credit use. Our research question asks: do individual differences such as mental budgeting, self-control, and short-term orientation predict the use of revolving credit to finance purchases?; In our second research question, we investigate the relationship between consumers' price consciousness and revolving credit use. We define price consciousness as the relative attention given to price in purchase decisions. We ask whether buyers who are more price-conscious are less likely to use revolving credit.; Findings of two studies are reported here. Study I uses data from the 1995 Survey of Consumer Finances (SCF). This analysis verifies that saving behaviors and short-term orientation are significant determinants of revolving credit use. Thus, individuals' psychological characteristics can be used in addition to economic variables in explaining individual financial behavior.; Study II involves the development of a measure of individual's propensity for mental budgeting followed by a survey using the Arkansas Household Research Panel (AHRP). We use a structural equation modeling approach to test our theoretical model and hypotheses. Our results generally support a mental accounting framework. In particular, we find that mental budgeting and short-term orientation are associated with higher revolving credit use. People with self-control and people who are more price-conscious are less likely to use revolving credit. In addition, these results suggest that a mental accounting framework helps to explain price consciousness as well.; Finally, implications of this research are presented for managers, policy makers, consumer educators, and behavioral decision theorists. |
