Understanding and knowledge of credit cost and duration: Effects on credit judgements and decisions
Financial capability requires understanding measures of consumer credit cost and using them appropriately in credit judgements and decisions. In three studies, UK adults' understanding and use of credit cost and duration information were investigated from a bounded rationality perspective. Study 1, part of a representative survey of UK adults (NÂ =Â 1000), found that when presented with annual percentage rate (APR) participants significantly overestimated the total cost (TC) of a 12-month loan. In Study 2, loan duration and APR were varied in an independent groups experiment (NÂ =Â 242). Bank customers' TC estimates were sensitive to both loan duration and APR but TC was again substantially overestimated. Study 3 was an independent groups experiment investigating the effect of APR and TC information on credit decisions (NÂ =Â 241). APR often influenced decisions between loans varying in duration and monthly repayment, but this effect was moderated by TC information. It was concluded that: (1) people generally misunderstand the relation between APR and TC; and (2) although APR information can have a large effect on credit decisions, its effect is either attenuated or amplified by TC information. The findings are interpreted in terms of a 'take the best APR' heuristic and a dual mental account model of instalment credit. Recommendations for improving credit information provision and financial education are offered.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Dean Karlan & Eldar Shafir & Jonathan Zinman & Marianne Bertrand & Sendhil Mullainathan, 2006.
"What's psychology worth? A field experiment in the consumer credit market,"
Natural Field Experiments
00217, The Field Experiments Website.
- Marianne Bertrand & Dean Karlin & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," NBER Working Papers 11892, National Bureau of Economic Research, Inc.
- Ranyard, Rob & Craig, Gill, 1993. "Estimating the duration of a flexible loan: The effect of supplementary information," Journal of Economic Psychology, Elsevier, vol. 14(2), pages 317-335, June.
- Richard Thaler, 1985.
"Mental Accounting and Consumer Choice,"
INFORMS, vol. 4(3), pages 199-214.
- Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
- Ranyard, Rob & Craig, Gill, 1995. "Evaluating and budgeting with instalment credit: An interview study," Journal of Economic Psychology, Elsevier, vol. 16(3), pages 449-467, September.
- Adele Atkinson & Stephen McKay & Sharon Collard & Elaine Kempson, 2007. "Levels of Financial Capability in the UK," Public Money & Management, Chartered Institute of Public Finance and Accountancy, vol. 27(1), pages 29-36, 02.
- Bettman, James R & Luce, Mary Frances & Payne, John W, 1998. " Constructive Consumer Choice Processes," Journal of Consumer Research, University of Chicago Press, vol. 25(3), pages 187-217, December.
- Drazen Prelec & George Loewenstein, 1998. "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, INFORMS, vol. 17(1), pages 4-28.
- Ranyard, Rob & Hinkley, Lisa & Williamson, Janis & McHugh, Sandie, 2006. "The role of mental accounting in consumer credit decision processes," Journal of Economic Psychology, Elsevier, vol. 27(4), pages 571-588, August.
When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:32:y:2011:i:4:p:609-620. 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: (Zhang, Lei)
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.