Interest Rate Misperceptions in the Credit Card Market
53 Pages Posted: 24 Oct 2022 Last revised: 8 Nov 2024
Date Written: November 06, 2024
Abstract
This paper investigates consumer misperceptions of credit card debt interest costs through a combination of administrative data, surveys, and randomized controlled trials. Our findings indicate that consumers possess imperfect knowledge about the interest costs of unsecured debt, resulting in large debt accumulation. Rather than being driven by liquidity constraints, this over-borrowing appears to be a mistake mainly from spending on luxury goods. A simple text alert informing debt-takers of the true interest costs on their credit cards reduces credit card debt by over 10%.
JEL Classification: E21, G40, G51, G53, M37
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