Do Credit Card Companies Screen for Behavioral Biases?

Abstract

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