Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?
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.)
Volume (Year): 99 (2009)
Issue (Month): 2 (May)
|Contact details of provider:|| Web page: https://www.aeaweb.org/aer/|
More information through EDIRC
|Order Information:||Web: https://www.aeaweb.org/subscribe.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- William Adams & Liran Einav & Jonathan Levin, 2007.
"Liquidity Constraints and Imperfect Information in Subprime Lending,"
NBER Working Papers
13067, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Irina A. Telyukova & Randall Wright, 2006. "A Model of Money and Credit, with Application to the Credit Card Debt Puzzle," 2006 Meeting Papers 45, Society for Economic Dynamics.
- Irina A. Telyukova & Randall Wright, 2007. "A model of money and credit, with application to the credit card debt puzzle," Working Paper 0711, Federal Reserve Bank of Cleveland.
- 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.
- 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.
- Michael A. Stegman, 2007. "Payday Lending," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 169-190, Winter.
- Zinman, Jonathan, 2009.
"Debit or credit?,"
Journal of Banking & Finance,
Elsevier, vol. 33(2), pages 358-366, February.
- Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006.
"Do consumers choose the right credit contracts?,"
Working Paper Series
WP-06-11, Federal Reserve Bank of Chicago.
- 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.
- 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.
- Borzekowski, Ron & Kiser, Elizabeth K., 2008.
"The choice at the checkout: Quantifying demand across payment instruments,"
International Journal of Industrial Organization,
Elsevier, vol. 26(4), pages 889-902, July.
- 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.).
- David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 149-185.
When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:99:y:2009:i:2:p:412-17. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)or (Michael P. Albert)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.