Working Paper: CEPR ID: DP12506
Authors: Alexei Alexandrov; Zlem Bedredefolie; Daniel Grodzicki
Abstract: We estimate how demand for credit card transacting, borrowing, and late payment responds to the interest rate and late payment fee. We find that lower rates increase borrowing and lower fees increase late payments. Prime cardholders demand for all services is decreasing in any price. In contrast, subprime cardholders borrow less when fees drop, a response consistent with models of limited attention. We calculate that a 2 percentage point rise in the Federal Funds rate decreases borrowing by 16 percent, or $130 billion, that this effect is greater in higher income communities, and that it exhibits geographic agglomeration.
Keywords: consumer demand; credit card services; interest rates; late payment fees
JEL Codes: D12; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower interest rates (E43) | increase borrowing (H74) |
| lower late payment fees (G51) | increase late payments (J33) |
| a 2 percentage point rise in the federal funds rate (E52) | decrease borrowing (G51) |
| lower late fees (G51) | decrease borrowing for subprime cardholders (G51) |
| a rise in APR (E49) | hold fewer balances (G51) |
| complexity of credit card pricing (D40) | lack of salience for backend fees (G19) |
| lack of salience for backend fees (G19) | affect consumer behavior (D19) |
| subprime cardholders (G51) | less rational behavior compared to prime cardholders (D91) |