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

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  • 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.

(This abstract was borrowed from another version of this item.)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.2.412
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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. Borzekowski, Ron & Kiser, Elizabeth K., 2008. "The choice at the checkout: Quantifying demand across payment instruments," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(4), pages 889-902, July.
  3. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
  4. William Adams & Liran Einav & Jonathan Levin, 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending," American Economic Review, American Economic Association, American Economic Association, vol. 99(1), pages 49-84, March.
  5. Irina A. Telyukova & Randall Wright, 2006. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," 2006 Meeting Papers, Society for Economic Dynamics 45, Society for Economic Dynamics.
  6. Michael A. Stegman, 2007. "Payday Lending," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 169-190, Winter.
  7. Sumit Agarwal & John C Driscoll & Xavier Gabaix & David Laibson, 2008. "Learning in the Credit Card Market," Levine's Working Paper Archive 122247000000002028, David K. Levine.
  8. 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.
  9. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006. "Do consumers choose the right credit contracts?," Working Paper Series, Federal Reserve Bank of Chicago WP-06-11, Federal Reserve Bank of Chicago.
  10. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2010. "Benefits of relationship banking: evidence from consumer credit markets," Working Paper Series, Federal Reserve Bank of Chicago 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. Sera Linardi & Tomomi Tanaka, 2012. "Competition as a Savings Incentive: a Field Experiment at a Homeless Shelter," Working Papers, University of Pittsburgh, Department of Economics 484, University of Pittsburgh, Department of Economics.
  2. Agarwal, Sumit & Ben-David, Itzhak & Amromin, Gene & Chomsisengphet, Souphala & Evanoff, Douglas D., 2012. "Predatory Lending and the Subprime Crisis," Working Paper Series 2012-08, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  3. Richard W. Evans, 2012. "Determinants of Short-term Consumer Lending Interest Rates," BYU Macroeconomics and Computational Laboratory Working Paper Series, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory 2012-07, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
  4. 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, American Economic Association, vol. 99(2), pages 412-17, May.
  5. Cambpbell, John Y. & Jackson, Howell Edmunds & Madrian, Brigitte & Tufano, Peter, 2010. "The Regulation of Consumer Financial Products: An Introductory Essay with Four Case Studies," Scholarly Articles 4450128, Harvard Kennedy School of Government.
  6. John V. Duca & Anil Kumar, 2011. "Financial literacy and mortgage equity withdrawals," Working Papers, Federal Reserve Bank of Dallas 1110, Federal Reserve Bank of Dallas.
  7. Wilson Bart J & Findlay David W. & Meehan James W. & Wellford Charissa & Schurter Karl, 2010. "An Experimental Analysis of the Demand for Payday Loans," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, October.
  8. ArgandoƱa, Antonio, 2012. "Three ethical dimensions of the financial crisis," IESE Research Papers D/944, IESE Business School.
  9. 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).
  10. Robert Mayer, 2013. "When and Why Usury Should be Prohibited," Journal of Business Ethics, Springer, Springer, vol. 116(3), pages 513-527, September.
  11. repec:reg:wpaper:631 is not listed on IDEAS
  12. Christopher B. Bumcrot & Judy Lin & Annamaria Lusardi, 2011. "The Geography of Financial Literacy," Working Papers, RAND Corporation Publications Department 893, RAND Corporation Publications Department.
  13. Rodrigue Mendez, 2012. "Predatory Lending," Working Papers hal-00991948, HAL.

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  1. Economic Logic blog

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