Working Paper: NBER ID: w22360
Authors: Hong Ru; Antoinette Schoar
Abstract: We look at the supply side of the credit card market to analyze the pricing and marketing strategies of credit card offers. First, we show that card issuers target less-educated customers with more steeply back-loaded fees (e.g., lower introductory APRs but higher late and over-limit fees) compared offers made to educated customers. Second, issuers use rewards programs to screen for unobservable borrower types. Conditional on the same borrower type, cards with rewards, such as low introductory APR programs, also have more steeply backloaded fees. In contrast, cards with mileage programs, which are offered mainly to the most-educated consumers, rely much less on back-loaded fees. Finally, using shocks to the credit risk of customers via increases in state-level unemployment insurance, we show that card issuers rely more heavily on back-loaded and hidden fees when customers are less exposed to negative cash flow shocks. These findings are in line with the recent behavioral contract theory literature.
Keywords: credit card market; behavioral biases; financial literacy; credit risk; backloaded fees
JEL Codes: G02; G1; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| less educated customers (G29) | more steeply backloaded fees (G19) |
| credit card issuers (G21) | target less educated customers with more backloaded fees (G51) |
| less sophisticated consumers (D19) | higher fees and balances (E49) |
| credit card terms complexity (G51) | disproportionately impacts less sophisticated consumers (F61) |
| credit card issuers (G21) | adjust strategies based on perceived sophistication of customers (L15) |
| state unemployment insurance increases (J65) | issuers rely more on backloaded terms (G32) |