How Do Consumers Avoid Penalty Fees? Evidence From Credit Cards

72 Pages Posted: 1 May 2017 Last revised: 21 Jul 2018

John Gathergood

University of Nottingham - School of Economics

Hiroaki Sakaguchi

University of Warwick

Neil Stewart

Warwick Business School, University of Warwick

Joerg Weber

University of Nottingham - School of Economics; University of Nottingham - Centre for Decision Research and Experimental Economics

Date Written: July 10, 2018

Abstract

We use detailed data from multiple card issuers to show that credit card late payment fees decline sharply over the first few months of card life. This may suggest that consumers learn to remember to repay on time, but we show that memory does not drive this decline in fees. Instead, it is wholly due to consumers switching to automatic payments -- thereby avoiding the need to remember to repay altogether. Not all consumers make this switch. Those who continue with manual payments, relying on memory to repay on time, see the likelihood of future fees unchanged at 20% per month. We conclude that heterogeneity in adopting account management features of financial products, such as automatic repayments, is important for understanding who avoids financial mistakes.

Keywords: credit cards, penalty fees, automatic payments, direct deposit

JEL Classification: D10, D12, D4, G21

Suggested Citation

Gathergood, John and Sakaguchi, Hiroaki and Stewart, Neil and Weber, Joerg, How Do Consumers Avoid Penalty Fees? Evidence From Credit Cards (July 10, 2018). Available at SSRN: https://ssrn.com/abstract=2960004 or http://dx.doi.org/10.2139/ssrn.2960004

John Gathergood (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

HOME PAGE: http://https://sites.google.com/site/gathergoodjohn/

Hiroaki Sakaguchi

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Neil Stewart

Warwick Business School, University of Warwick ( email )

Gibbet Hill Road
Coventry, West Midlands CV4 8UW
United Kingdom

HOME PAGE: http://www.stewart.warwick.ac.uk

Joerg Weber

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 (0)115 95 15870 (Phone)

University of Nottingham - Centre for Decision Research and Experimental Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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