Inferring Financial Sophistication: Evidence Using Credit Card Balance Transfers and the CARD Act

34 Pages Posted: 1 Jul 2020 Last revised: 20 May 2021

See all articles by Young Hwa Seok

Young Hwa Seok

Board of Governors of the Federal Reserve System

James Wang

Board of Governors of the Federal Reserve System

Date Written: March 1, 2021

Abstract

We measure financial sophistication by observing the use of a credit card balance transfer strategy. Examining trends before and after the phase-out of this strategy due to the 2009 CARD Act, financially sophisticated borrowers are less risky, face more attractive card terms, and pay lower fees. We find no evidence that card lenders price sophistication into initial card terms such as APR or credit limits. The prevalence of sophisticated borrowers in a zip code strongly correlates with local graduation and unemployment rates. We also document positive spillovers of credit card sophistication onto usage and risk for other consumer loans.

Keywords: Financial Sophistication, CARD Act

Suggested Citation

Seok, Young Hwa and Wang, James, Inferring Financial Sophistication: Evidence Using Credit Card Balance Transfers and the CARD Act (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=3606693 or http://dx.doi.org/10.2139/ssrn.3606693

Young Hwa Seok

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

James Wang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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