How Do Consumers Avoid Penalty Fees? Evidence From Credit Cards
90 Pages Posted: 1 May 2017 Last revised: 11 Dec 2019
Date Written: December 11, 2019
Using data from multiple card issuers, we show that the most common penalty fee type incurred by credit card holders – late payment fees – declines sharply over the first few months of card life. This phenomenon is wholly due to some consumers adopting automatic payments after a late payment event, thereby insuring themselves against future late payment fees. Non-adopters, who remain on manual-only payments, experience an unchanged high likelihood of future fees, despite exhibiting ample levels of available liquidity. Our results show that heterogeneity in adopting account management features of financial products, such as automatic payments, is important for understanding who avoids financial mistakes.
Keywords: credit cards, penalty fees, automatic payments, direct deposit
JEL Classification: D10, D12, D4, G21
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