Evidence type: Insight i
Qualitative research is more exploratory, and uses a range of methods like interviews, focus groups and observation to gain a deeper understanding about specific issues - such as people’s experiences, behaviours and attitudes.
Quantitative research uses statistical or numerical analysis of survey data to answer questions about how much, how many, how often or to what extent particular characteristics are seen in a population. It is often used to look at changes over time and can identify relationships between characteristics like people’s attitudes and behaviours.
Most U.S. consumers hold savings and debt at the same time, even when the interest they are paying on the debt is higher than the interest they are earning. Previous work from an economic perspective and using observational data to explain this seemingly irrational behaviour, suggests that it may be due to a number of factors, such as the need for a savings cushion, concerns about unexpected reductions in credit card limits, or the desire to limit further spending. In contrast, this study is the first of its kind to take an experimental approach, using hypothetical scenarios, to explore possible psychological explanations for this behaviour.
Using an online survey platform, participants were presented with an experimental scenario that randomly assigned them to one of ten conditions - ten savings amounts ranging between $1,000 and $10,000, belonging to a hypothetical ‘Mr Green’ - and asked how much savings they wanted to apply toward reducing his $5,000 in credit card debt.
The study used a convenience sample (recruited and compensated through Amazon’s Mechanical Turk, a crowdsourcing service) comprising 551 study participants, with 49 to 61 study participants randomly assigned to each of the ten savings scenarios.
Participants were also asked questions to assess their knowledge of the relative interest rates between savings accounts and credit cards, to test whether interest rate knowledge played a role in participants’ choices.
The experiment was conducted by the Research Office of the US Consumer Financial Protection Bureau, a government agency that makes sure banks, lenders, and other financial companies treat consumers fairly.
The study found that the participants chose to preserve a savings cushion while also reducing debt.
There was no evidence that participants’ knowledge of relative interest rates between savings and credit cards influenced their decisions about how much savings to put toward credit card debt reduction.
The authors conclude that the study provides a valuable first step toward understanding how consumers preserve a savings cushion while pursuing debt reduction, but that there are many other questions about the motivation and behaviours of consumers that need to be explored.