Do Credit Card Companies Screen for Behavioral Biases?
47 Pages Posted: 15 Jun 2016 Last revised: 17 Feb 2017
Date Written: January 14, 2017
We analyze the supply side of credit card markets, and the pricing and marketing strategies of issuers. First, card issuers target less-educated customers with more steeply back-loaded and hidden fees (e.g. higher late and over-limit fees). Second, issuers use rewards programs to screen for unobservable borrower types. Finally, we use increases in state-level unemployment insurance (UI) as positive shocks to creditworthiness and show that issuers rely more on back-loaded (hidden) fees when UI increases, especially for less-educated customers. This result documents a novel trade-off: card issuers weigh short-term fee maximization against increases in credit risk, when using back-loaded fees.
JEL Classification: G01, G02, G21, G23
Suggested Citation: Suggested Citation