How Do Consumers Avoid Penalty Fees? Evidence From Credit Cards

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

Suggested Citation: Suggested Citation

Gathergood, John and Sakaguchi, Hiroaki and Stewart, Neil and Weber, Joerg, How Do Consumers Avoid Penalty Fees? Evidence From Credit Cards (December 11, 2019). Available at SSRN: https://ssrn.com/abstract=2960004 or http://dx.doi.org/10.2139/ssrn.2960004