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Do credit card companies screen for behavioural biases?

Hong Ru and Antoinette Schoar

No 842, BIS Working Papers from Bank for International Settlements

Abstract: Using granular data on the contract terms and design details of more than 1.3 million credit card offers, we document how card issuers shroud unappealing, back-loaded features of an offer (e.g., high default APRs, late or over-limit fees) via the position of the information, font size, or complexity of the language used. More heavily shrouded offers that rely on back-loaded fees are also more likely to be offered to less-educated consumers. In addition, we document a novel interaction between behavioral screening and adverse selection: Using changes in state-level unemployment insurance (UI) as positive shocks to consumer creditworthiness, we show that issuers rely more on shrouded and back-loaded fees when UI increases, especially for less-educated consumers. Card issuers weigh short-term rent maximization against increased credit risk when targeting consumers' behavioral biases.

Keywords: credit card; shrouding; back-loaded (search for similar items in EconPapers)
JEL-codes: G02 G1 G21 G23 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2020-02
New Economics Papers: this item is included in nep-cfn
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