Interest Rate Misperception in the Credit Card Market

Abstract

Combining bank account data and surveys, we find that consumers have noisy perceptions of the interest costs of credit card debt. Underestimations in interest rates induce a higher debt, while overestimations do not affect borrowing. Undergoing an information treatment that informs the true costs of borrowing, consumers with underestimations upwardly revised their perceived interest rates and reduced debts. Despite a huge instantaneous response, consumers' misperceptions and debts reverted by more than 50\% six months post-treatment. To explain the short-living effects, we use consumers' banking app login behavior to show that the reversal of misperception is consistent with the ostrich effect where consumers selectively avoid unfavorable information when interest rates are high.

Keywords: Misbeliefs, Randomized Controlled Trials, Ostrich Effects, Information Acquisition

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