Interest Rate Misperception in the Credit Card Market

Abstract

We investigate the extent to which consumers misperceive the interest costs associated with credit card debt using a combination of administrative data and surveys. Through a randomized controlled trial with an information treatment, our results show that consumers are imperfectly informed about the interest cost of unsecured debt, and the resulting misperception induces excess debt-taking by 26%, mainly originating from spending on luxury goods. To understand the formation of interest rate misperception, we uncover selective information acquisition to be a potential channel. We demonstrate that consumers tend to actively seek information about their borrowing status when they expect creditworthiness to be high, and they disproportionately pay more attention to favorable information when interest rates are low.

Keywords: Misbeliefs, Randomized Controlled Trials, Excess Borrowing, Selective Information Acquisition.

JEL Classification: E21, G40, G51, G53, M37