Do Credit Card Companies Screen for Behavioral Biases?
53 Pages Posted: 15 Jun 2016 Last revised: 13 Oct 2023
Date Written: October 11, 2023
Using data from 1.3 million credit card offer letters, we show that issuers shroud unfavorable card features via back-loading of payment terms (e.g., high default APRs or late fees), strategic positioning of information, small fonts, or complex language. Especially, less-educated consumers are targeted with shrouded offers more often. We also document a novel interaction between behavioral screening and adverse selection: Issuers rely more heavily on shrouded and back-loaded terms if consumers are more creditworthy (instrumented through changes in state-level unemployment insurance), especially for less-educated consumers. Card issuers weigh short-term rent maximization against increased credit risk when targeting consumers’ behavioral biases.
Keywords: Credit Card, Shrouding, Back-loaded
JEL Classification: G01, G02, G21, G23
Suggested Citation: Suggested Citation