Do Credit Card Companies Screen for Behavioral Biases?
50 Pages Posted: 15 Jun 2016 Last revised: 5 Sep 2019
Date Written: September 5, 2019
Using granular data on the contract terms and design details of more than 1.3 million credit card offers, we document how card issuers shroud unappealing, back-loaded features of an offer (e.g., high default APRs, late or over-limit fees) via the position of the information, font size, or complexity of the language used. More heavily shrouded offers that rely on back-loaded fees are also more likely to be offered to less-educated consumers. In addition, we document a novel interaction between behavioral screening and adverse selection: Using changes in state-level unemployment insurance (UI) as positive shocks to consumer creditworthiness, we show that issuers rely more on shrouded and back-loaded fees when UI increases, 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