Essay Sample on Arguments on Credit Payments

Published: 2023-11-06
Essay Sample on Arguments on Credit Payments
Type of paper:  Essay
Categories:  Finance Money Debt
Pages: 6
Wordcount: 1591 words
14 min read


There are a lot of varied opinions on how people borrow and how they make credit payments. Organizations tend to lend money to creditors with an agreement on when to make repayments. Some institutions agree on monthly repayments while others agree on quarterly repayments. Whichever plan an organization sets, there is no guarantee that a creditor will fulfill the agreement. It is essential to realize that people borrow money for different reasons. Such reasons include emergencies such as sickness, business loans, and loans for personal use, among other reasons (Bhattacharjee & Rajeev, 2013, p.40). When a person is borrowing a loan for business, one expects that in a month or two, they will have recovered the amount and repaid the loan. However, starting a business is difficult, and the commencement period is faced with challenges that may lead to closure. More often than not, Small business enterprises fail in the early years of establishment. When this happens, one will not be able to repay the loan in the period they agreed with the lender (Bhattacharjee & Rajeev, 2013, p.45)). Some companies decide to auction collaterals or individual properties of the creditors to recover the amount. Therefore, the purpose of this paper is to review the article” How do Individuals repay their Debts-The Balance-Matching Heuristic” and identify the weaknesses in the content of the authors.

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Optimal Allocation Repayments

The article assumes that if an individual has two credit cards. There is a likelihood that the person will allocate an equal amount of money to either cards hen making repayments. However, this is not the case. Most individuals with double credit cards weigh options depending on the interest charges of each (Dorfleitner & Oswald, 2016, p.46). Individuals with a guaranteed monthly salary have to budget adequately to ensure that their loans are repaid in time. If one card accrues a higher interest than another, the individual will be forced to consider repaying the credit for that card with higher interest rates (Dorfleitner & Oswald, 2016, p.48). For instance, if you borrow a loan of $100 on two credit cards and the repayment amount for each card is $110, you may assume that repayments will be made equally for each card when you get your salary (Bhattacharjee & Rajeev, M., 2013, p.56). However, each credit card may only have a similar total repayment amount, but the interest rates differ across companies. Therefore, in such cases, individuals tend to prevent further additional charges by deciding to repay credit cards with higher interest charges.

Depending on your income, you are likely to repay 90 percent to that credit card that has a higher interest charge, while only 10 percent will be repaid to that company with a low-interest rate (Georgarakos & FĂĽrth, 2015, p.258). The main reason why most people have this optimal behavior us that the longer you take, the higher the interest charges accrue on your loan amount. The higher interest amount implies that you will have a negative credit history that will prevent you from borrowing in any other organization. Since one cannot predict when they will need the loan to facilitate their emergencies, it is essential to keep clean credit history. Therefore, the optimal behavior in repayment of loans is well understood. Thus, since the article states that repayments on dual credit cards have to depend on a certain minimum that ensures a 50% percent allocation on each card, this research points out that the amount allocated to either card depends on the interest rates of either card (Georgarakos & FĂĽrth, 2015, p.260).

The article also documents that 85% of creditors should put 10 percent of their repayment amounts on the cards with high interests, yet only 10 percent do so (Sanrego & Antonio, 2013, p.194). In an argument with this statement, you cannot pay a hundred percent to one credit card whole the other receives none. Yet, they have a similar repayment period irrespective of the interest charges. Therefore, it will only make sense if you allocate 70/30 percent on the high and low-interest charge cards to ensure that you are making an impact on either side (Sanrego &Antonio et al., 2013, p.199). Also, it is wrong to mention that only 10 percent of individuals consider making repayments on the cards with a higher interest. The percentages are higher depending on the individual financial needs and the economic state of their countries that impacts on their annual incomes. Non-optimal financial repayments cannot be treated uniformly, as the article states. How much an individual earns depends on the economy of their country. It is this annual income that determines the repayment abilities.

Misallocation of Repayments

The issue of misallocation of repayments is dependent on a variety of factors. Whereas the optimal amount of repayments may direct borrowers on appropriate repayment methods, other factors limit their decisions. The optimal principle is limited to a person’s income, and collateral agreed during borrowing (Sanrego & Antonio, 2013, p.200). However, factors like psychological, physical, and business growth may cause friction in the repayments. The mentioned factors are among the existing constraints that limit borrowers when deciding when and how much to repay.

Sometimes, individuals may overlook the idea of the collateral and the high-interest cards when allocating repayments. If the collateral is not of much importance, the individual or company may as well fail to repay, and late, the collateral is auctioned (Jones et al., 2015, p.47). Also, misallocations occur when a company reviews that the loan amount they acquired from company A was not as productive as they thought. Since Company A charges higher interest on the loan whose investment has not yielded any reasonable profits, most individuals will direct repayments to Company B (with low interest). Also, low-interest charges assure companies and individuals that they will be rated positively upon completion. As a result, they may choose to repay the lower interest loans before repaying those warded by Company A.

Heuristics That Determine Repayment Behavior

The article describes the heuristics related to stable matching. In the method, the authors state that repayments are matched with the balance amount on either card. In this case, it is easier to determine which card is lagging in terms of repayments. However, only a few individuals adhere to such repayments. It seems like an automatic payment in which repayments are guaranteed, and there is no breach (Chen &Jiang, 2020, p.300). However, depending on individual circumstances, repayments cannot be optimal, and neither can they be made in good time. Companies have to allocate a time allowance for which the due date for repayments can be exceeded.

The paper identified interest rates as major determinants of repayment behaviors. Moreover, the grace period is another determiner of repayment behavior. For instance, a longer grace period allows a borrower to plan themselves before starting repayments (Brown et al., 2016, p.2491). If the loan was borrowed to facilitate business activities, a longer grace period allows one to re-generate more proceeds from the business and repay the loan in a good time. On the contrary, a shorter grace period limits a borrower’s ability to use and repay the loan n a good time (Brown et al., 2016. p.2493). Borrowers and lenders are advised to choose longer grace periods to prevent cases of default. Additionally, the moral behavior of an individual determines their ability to repay. Most companies are secluding themselves from malicious borrowers by reviewing their credit history with other lenders. However, it is not enough if a malicious borrower has no history of poor credit. Thus, such lenders borrow only for fun and with no intention to repay the loans. Nonetheless, this factor is difficult to prevent.


Conclusively, the purpose of this paper was to identify weaknesses in the article “How do Individuals Repay their Debts. –The Balance-Matching Heuristics”. The findings of this study identified weaknesses in the information about the optimal allocation of repayments, misallocations, and the heuristics that determine repayment behavior. The identified determiners of repayment behavior include interest rates, the economics of a state, and income of an individual, the grace period, and the morality of an individual. Therefore, lenders have to consider all these factors before agreeing on the amount and period of repayment with the borrowers. A loan that is profitable to an individual and has low-interest rates is an easy one to repay since you yearn for a higher limit and a positive credit score. On the contrary, a loan with a higher interest and less profitability discourages borrowers and forces them to let their collaterals be auctioned.


Bhattacharjee, M. and Rajeev, M., 2013. Modeling loan repayment behavior in developing countries. Applied

Brown, M., Grigsby, J., Van Der Klaauw, W., Wen, J. and Zafar, B., 2016. Financial education and the debt behavior of the young. The Review of Financial Studies, 29(9), pp.2490-2522.

Chen, S. and Jiang, X., 2020. Modeling Repayment Behavior of Consumer Loan in Portfolio across Business Cycle: A Triplet Markov Model Approach. Complexity, 2020.

Dorfleitner, G. and Oswald, E.M., 2016. Repayment behavior in peer-to-peer microfinancing: Empirical evidence from Kiva. Review of Financial Economics, 30, pp.45-59.

Georgarakos, D. and FĂĽrth, S., 2015. Household repayment behavior: The role of social capital and institutional, political, and religious beliefs. European Journal of Political Economy, 37, pp.249-265.

Jones, L.E., Loibl, C. and Tennyson, S., 2015. Effects of informational nudges on consumer debt repayment behaviors.

Sanrego, Y.D. and Antonio, M.S.I., 2013. The effect of social capital on loan repayment behavior of the poor (a study on Group Lending Model (GLM) application in islamic microfinance institution). Journal of Indonesian Economy and Business, 28(2), pp.188-210.

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