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Credit Card Pricing: The CARD Act and Beyond

Oren Bar-Gill

Harvard Law School

Ryan Bubb

New York University School of Law

November 15, 2011

Cornell Law Review, Vol. 97, 2012
NYU Law and Economics Research Paper No. 11-40

We take a fresh look at the concerns about credit card pricing and empirically investigate whether the Credit CARD Act of 2009 has been successful in addressing those concerns. The rational choice theory of credit card pricing, which posits that issuers use back-end fees to adjust the price of credit to reflect new information about borrowers’ credit risk, predicts that issuers will respond to the Act by using alternative ways to price risk. In contrast, the behavioral economics theory, which posits that issuers use back-end fees because they are not salient to consumers, predicts that issuers will respond by increasing unregulated non-salient prices. If the market is competitive, we argue that the CARD Act should also result in increases in some salient, up-front prices. But we show that if issuers have market power, reductions in non-salient fees may not result in concomitant increases in salient charges. We test these predictions using two datasets on credit card contract terms before and after the CARD Act rules went into effect. We find that the rules have substantially reduced the back-end fees directly regulated by the Act, including late fees and over-the-limit fees. However, unregulated contract terms, such as annual fees and purchase interest rates, have changed little. Post-CARD Act, consumers continue to face high long-term prices and low short-term prices, and imperfectly rational consumers still find it difficult to understand the cost of credit card borrowing. We thus consider potential improvements to the regulatory framework. We argue that improved disclosures that present to consumers the aggregate cost of credit under the contract, based on information about the borrower’s likely use of credit, would improve consumer outcomes. Furthermore, we suggest that regulators, rather than focusing on prices that are “too high,” should consider limiting the ability of issuers to charge introductory teaser interest rates that are in a sense “too low.”

Number of Pages in PDF File: 44

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Date posted: November 18, 2011 ; Last revised: July 9, 2015

Suggested Citation

Bar-Gill, Oren and Bubb, Ryan, Credit Card Pricing: The CARD Act and Beyond (November 15, 2011). Cornell Law Review, Vol. 97, 2012; NYU Law and Economics Research Paper No. 11-40. Available at SSRN: http://ssrn.com/abstract=1960005

Contact Information

Oren Bar-Gill (Contact Author)
Harvard Law School ( email )
1563 Massachusetts Avenue
Cambridge, MA 02138
United States
Ryan Bubb
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
(212)992-8871 (Phone)
HOME PAGE: http://https://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=34148
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