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Learning with Your Credit Card: Evidence from Consumer Responses to Penalty Fees

66 Pages Posted: 1 May 2017 Last revised: 13 Nov 2017

John Gathergood

University of Nottingham - School of Economics

Hiroaki Sakaguchi

University of Warwick

Neil Stewart

University of Warwick

Joerg Weber

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

Date Written: November 12, 2017

Abstract

Consumers commonly incur late payment fees in the first few months of using a new credit card. These fees subsequently decline, suggesting that consumers learn to repay on time. Using a quarter of a million new credit card openings, we investigate consumer responses to penalty fees. We find that following a late payment fee, some consumers react by switching to automatic repayments, thereby insuring themselves against future forgetting and eliminating future late payment fees. Other consumers, who appear on average to be less sophisticated, continue with manual payments, relying on remembering to repay on time in the future. But this proves to be completely ineffective, with an ongoing likelihood of future fees unchanged at 20% per month. We conclude that consumer heterogeneity in adopting additional features of financial products, such as automatic repayments, is crucial for understanding whether and how consumers learn from experience.

Keywords: learning, credit cards, automatic payments, direct deposit

JEL Classification: D10, D12, D4, G21

Suggested Citation

Gathergood, John and Sakaguchi, Hiroaki and Stewart, Neil and Weber, Joerg, Learning with Your Credit Card: Evidence from Consumer Responses to Penalty Fees (November 12, 2017). Available at SSRN: https://ssrn.com/abstract=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

University of Warwick ( email )

Gibbet Hill Rd.
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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