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The effect of promotional interest rates on customer borrowing and payment behavior in the credit card industry

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  • B. P. S. Murthi

    (The University of Texas at Dallas)

  • Marina Girju

    (DePaul University)

  • Erin Steffes

    (Towson University)

Abstract

Credit card companies typically offer limited-time teaser interest rates [also known as promotional annual percentage rates (APRs)] to attract new customers. Firms hope that the promotional APRs will encourage consumers not only to open accounts, but also to transfer balances from other credit cards, revolve credit card balances, or take cash advances, each of which would lead to an increase in the firm’s profit. It is important to understand the effect of the promotional rates on customer behavior. Important research questions include: Does the lure of a low APR increase indebtedness of a customer over the short run and the long run? Between two segments—needy and opportunistic customers—which group is more likely to take advantage of the offer? A related important question for firms is whether the low APRs increase the financial risk (i.e., probability of delinquency or the probability of default of a customer) thus imposing costs of monitoring and balance recovery on the firm. Given the limited published research on these topics, we take a closer look at some of the behavioral patterns associated with the offer of promotional APRs in this study.

Suggested Citation

  • B. P. S. Murthi & Marina Girju & Erin Steffes, 2019. "The effect of promotional interest rates on customer borrowing and payment behavior in the credit card industry," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 24(1), pages 11-20, June.
    • Handle: RePEc:pal:jofsma:v:24:y:2019:i:1:d:10.1057_s41264-019-00063-8
    DOI: 10.1057/s41264-019-00063-8
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    References listed on IDEAS

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    Cited by:

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    3. Hway-Boon Ong & Lee-Lee Chong, 2023. "The effect of cashless payments on the internet and mobile banking," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 28(1), pages 178-188, March.

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