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Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?

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Author Info

  • Sumit Agarwal
  • Paige Marta Skiba
  • Jeremy Tobacman

Abstract

Using a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. First, more specifically, we assess consumers' effectiveness at prioritizing use of their lowest-cost credit option. We find that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans. This is costly because payday loans have annualized interest rates of at least several hundred percent, though perhaps partly explained by the fact that borrowers have experienced substantial declines in credit card liquidity in the year leading up to the payday loan. Second, we show that FICO scores and Teletrack scores have independent information and are specialized for the types of lending where they are used. Teletrack scores have eight times the predictive power for payday loan default as FICO scores. We also show that prime lenders should value information about their borrowers' subprime activity. Taking out a payday loan predicts nearly a doubling in the probability of serious credit card delinquency over the next year.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.2.412
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File URL: http://www.aeaweb.org/aer/data/may09/20090072_app.pdf
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 2 (May)
Pages: 412-17

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:2:p:412-17

Note: DOI: 10.1257/aer.99.2.412
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References

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  1. David B. Gross & Nicholas S. Souleles, 2001. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," NBER Working Papers 8314, National Bureau of Economic Research, Inc.
  2. Irina A Telyukova & Randall Wright, 2008. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," Review of Economic Studies, Wiley Blackwell, vol. 75(2), pages 629-647, 04.
  3. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2005. "Do Consumers Choose the Right Credit Contracts?," CFS Working Paper Series 2005/32, Center for Financial Studies.
  4. Jonathan Zinman, 2005. "Debit or credit?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  5. Ron Borzekowski & Elizabeth K. Kiser, 2006. "The choice at the checkout: quantifying demand across payment instruments," Finance and Economics Discussion Series 2006-17, Board of Governors of the Federal Reserve System (U.S.).
  6. Sumit Agarwal & Paige Marta Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," American Economic Review, American Economic Association, vol. 99(2), pages 412-17, May.
  7. William Adams & Liran Einav & Jonathan Levin, 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending," American Economic Review, American Economic Association, vol. 99(1), pages 49-84, March.
  8. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2008. "Learning in the Credit Card Market," NBER Working Papers 13822, National Bureau of Economic Research, Inc.
  9. Irina A. Telyukova & Randall Wright, 2008. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 629-647.
  10. Michael A. Stegman, 2007. "Payday Lending," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 169-190, Winter.
  11. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2010. "Benefits of relationship banking: evidence from consumer credit markets," Working Paper Series WP-2010-05, Federal Reserve Bank of Chicago.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Subprime borrowers make stupid financial decisions
    by Economic Logician in Economic Logic on 2009-02-19 20:01:00
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Cited by:
  1. Campbell, John Y. & Jackson, Howell E. & Madrian, Brigitte C. & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Working paper 631, Regulation2point0.
  2. Christopher B. Bumcrot & Judy Lin & Annamaria Lusardi, 2011. "The Geography of Financial Literacy," Working Papers 893, RAND Corporation Publications Department.
  3. Sera Linardi & Tomomi Tanaka, 2012. "Competition as a Savings Incentive: a Field Experiment at a Homeless Shelter," Working Papers 484, University of Pittsburgh, Department of Economics.
  4. Richard W. Evans, 2012. "Determinants of Short-term Consumer Lending Interest Rates," BYU Macroeconomics and Computational Laboratory Working Paper Series 2012-07, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
  5. Sumit Agarwal & Paige M. Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," NBER Working Papers 14659, National Bureau of Economic Research, Inc.
  6. Bart J. Wilson & David W. Findlay & James W. Meehan Jr. & Charissa Wellford & Karl Schurter, 2010. "An Experimental Analysis of the Demand for Payday Loans," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 93.
  7. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2012. "Can an interest-free credit facility be more efficient than a usurious payday loan?," Working Papers 12008, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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  1. Economic Logic blog

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