Do Consumers Borrow on Their Cheapest Credit Card? Evidence From Mexico

50 Pages Posted: 23 Mar 2009

See all articles by Alejandro Ponce

Alejandro Ponce

The World Justice Project

Enrique Seira

Instituto Tecnológico Autónomo de México (ITAM)

Guillermo Zamarripa

National Banking and Securities Commission, Mexico

Date Written: March 18, 2009

Abstract

Most cardholders have more than one credit card, yet, it is not evident how these individuals manage their accounts. In this paper we construct a novel data set that includes information on all the credit cards held by more than 10,000 consumers in Mexico in 2004 and 2005 and empirically study the intra-temporal allocation of debt, payments and purchases among the credit cards consumers already hold. We find that the difference in the interest rates between homogeneous cards is not an important determinant of allocations. On average, cardholders forego potential savings for a sum that amounts to 16% of their financing cost. We show that non-price determinants of allocations have more explanatory power than interest rates. We find that consumers tend to put a larger fraction of their monthly payments and purchases on the card they spent more on during the preceding billing period, regardless of their interest rate ranking. The most compelling explanation relates to mental accounting and financial unsophistication. The low price sensitivity can explain why high interest rates prevail in this market, regardless of any search or switching cost.

Keywords: Credit cards, household finance, heuristics, consumer behavior, Mexico

JEL Classification: D12 , D14, G20

Suggested Citation

Ponce, Alejandro and Seira, Enrique and Zamarripa, Guillermo, Do Consumers Borrow on Their Cheapest Credit Card? Evidence From Mexico (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1364722 or http://dx.doi.org/10.2139/ssrn.1364722

Alejandro Ponce (Contact Author)

The World Justice Project ( email )

740 15th Street NW
Washington, DC 20005
United States

HOME PAGE: http://www.worldjusticeproject.org

Enrique Seira

Instituto Tecnológico Autónomo de México (ITAM) ( email )

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico

Guillermo Zamarripa

National Banking and Securities Commission, Mexico ( email )

Insurgentes Sur 1971
Mexico D.F., 01020
Mexico

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