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Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?

19 Pages Posted: 25 Jan 2009 Last revised: 23 Jul 2010

Sumit Agarwal

Georgetown University - Department of Finance

Paige Marta Skiba

Vanderbilt University - Law School

Jeremy Tobacman

Alfred Lerner College of Business and Economics, University of Delaware

Multiple version iconThere are 2 versions of this paper

Date Written: January 2009

Abstract

Using a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. First, more specifically, we assess consumers' effectiveness at prioritizing use of their lowest-cost credit option. We find that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans. This is costly because payday loans have annualized interest rates of at least several hundred percent, though perhaps partly explained by the fact that borrowers have experienced substantial declines in credit card liquidity in the year leading up to the payday loan. Second, we show that FICO scores and Teletrack scores have independent information and are specialized for the types of lending where they are used. Teletrack scores have eight times the predictive power for payday loan default as FICO scores. We also show that prime lenders should value information about their borrowers' subprime activity. Taking out a payday loan predicts nearly a doubling in the probability of serious credit card delinquency over the next year.

Suggested Citation

Agarwal, Sumit and Skiba, Paige Marta and Tobacman, Jeremy, Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles? (January 2009). NBER Working Paper No. w14659. Available at SSRN: https://ssrn.com/abstract=1332598

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Paige Marta Skiba

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States
615-322-1958 (Phone)

Jeremy Tobacman

Alfred Lerner College of Business and Economics, University of Delaware ( email )

Newark, DE 19716
United States

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