Do Credit Card Companies Screen for Behavioural Biases?

53 Pages Posted: 9 Mar 2020

See all articles by Hong Ru

Hong Ru

Nanyang Technological University (NTU)

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: February 12, 2020

Abstract

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: G02, G1, G21, G23

Suggested Citation

Ru, Hong and Schoar, Antoinette, Do Credit Card Companies Screen for Behavioural Biases? (February 12, 2020). BIS Working Paper No. 842, Available at SSRN: https://ssrn.com/abstract=3549532

Hong Ru (Contact Author)

Nanyang Technological University (NTU) ( email )

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Singapore, 639798
Singapore
(+65) 67904661 (Phone)

HOME PAGE: http://https://hongru.mit.edu/

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive, E52-447
Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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