Do Credit Card Companies Screen for Behavioral Biases?

53 Pages Posted: 15 Jun 2016 Last revised: 13 Oct 2023

See all articles by Hong Ru

Hong Ru

Nanyang Business School, Nanyang Technological University

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Date Written: October 11, 2023

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

Suggested Citation

Ru, Hong and Schoar, Antoinette, Do Credit Card Companies Screen for Behavioral Biases? (October 11, 2023). Available at SSRN: https://ssrn.com/abstract=2795030 or http://dx.doi.org/10.2139/ssrn.2795030

Hong Ru (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
(+65) 67904661 (Phone)

HOME PAGE: http://https://hongru.mit.edu/

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

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