Untangling the Effects of Credit Cards on Money Demand: Convenience Usage vs. Borrowing

This paper examines whether households are using credit cards for the convenience of paying all cash at once and enjoying the float that is created in the meantime or merely using credit cards as an easy form of borrowing. Previous studies of credit cards on money demand are extended by adding borrowing into the empirical framework. By looking at the impact that the volume of a credit card revolving balance has on a transactions account as well as whether a household owns a credit card, the effects of convenience usage versus borrowing on the card can begin to be untangled. The results suggest that part of the negative effect of being a credit card-holder on money demand is due to borrowing.