Contract Terms, Employment Shocks, and Default in Credit Cards

Sara Castellanos, Diego Jiménez Hernández, Aprajit Mahajan, Eduardo Alcaraz Prous and Enrique Seira

No 24849, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Regulatory concerns over a tension between expanding financial access and limiting default have led to significant restrictions on contract terms in a number of countries, despite limited evidence on their effectiveness. We use a large nation-wide RCT to examine new borrower responses to changes in interest rates and minimum payments for a credit card that accounted for 15% of all first-time formal loans in Mexico. Default rates were 19% over the 26 month experiment and a 30 pp decrease in interest rates decreased default by 2.5 pp with no effects on the newest borrowers. Doubling minimum payments increased default by 0.8 pp during the experiment but reduced it by 1 pp afterwards, possibly by reducing debt. Matching the experimental sample to their formal employment histories we find that the effect of job separation—more common among new borrowers—on default is seven times larger than the contract term effects. We provide a simple framework for interpretation and rationalize the smaller contract term effects by their limited effects on cash flow, rather than by differences in per-peso impacts.

JEL-codes: D14 D18 D82 G20 G21 (search for similar items in EconPapers)
Date: 2018-07
New Economics Papers: this item is included in nep-ban, nep-big, nep-exp, nep-fle and nep-pay
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Working Paper: Contract Terms, Employment Shocks, andDefault in Credit Cards (2024)
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