Interest Rate Misperceptions in the Credit Card Market

53 Pages Posted: 24 Oct 2022 Last revised: 8 Nov 2024

See all articles by Tianyu Han

Tianyu Han

The Hong Kong University of Science and Technology

Xiao Yin

University College London

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

Suggested Citation

Han, Tianyu and Yin, Xiao, Interest Rate Misperceptions in the Credit Card Market (November 06, 2024). Available at SSRN: https://ssrn.com/abstract=4256372 or http://dx.doi.org/10.2139/ssrn.4256372

Tianyu Han (Contact Author)

The Hong Kong University of Science and Technology ( email )

HOME PAGE: http://tianyu-han.com

Xiao Yin

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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