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Bancarizing with Credit Cards: Experimental Evidence on Interest Rates and Minimum Payments Elasticities for New Clients

Author

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  • Seira Enrique
  • Castellanos Pascacio Sara Gabriela
  • Jiménez Hernández Diego J

Abstract

We study the bancarization of marginal borrowers using credit cards and document that this process is difficult: default risk is substantial, returns heterogeneous, and account closings common. We also take advantage of a randomized control trial that varied interest rates and minimum payments in a very wide range. Against our hypothesis, we find that default risk is very insensitive to (randomized) large changes in interest rates and minimum payments. This could imply that regulating these contract terms may not necessarily "protect" consumers against default and that moral hazard in this market is negligible on average.

Suggested Citation

  • Seira Enrique & Castellanos Pascacio Sara Gabriela & Jiménez Hernández Diego J, 2015. "Bancarizing with Credit Cards: Experimental Evidence on Interest Rates and Minimum Payments Elasticities for New Clients," Working Papers 2015-11, Banco de México.
    • Handle: RePEc:bdm:wpaper:2015-11
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    References listed on IDEAS

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    1. Dehejia, Rajeev & Montgomery, Heather & Morduch, Jonathan, 2012. "Do interest rates matter? Credit demand in the Dhaka slums," Journal of Development Economics, Elsevier, vol. 97(2), pages 437-449.
    2. 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.
    3. 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, President and Fellows of Harvard College, vol. 117(1), pages 149-185.
    4. Stephan Meier & Charles Sprenger, 2010. "Present-Biased Preferences and Credit Card Borrowing," American Economic Journal: Applied Economics, American Economic Association, vol. 2(1), pages 193-210, January.
    5. Liran Einav & Mark Jenkins & Jonathan Levin, 2013. "The impact of credit scoring on consumer lending," RAND Journal of Economics, RAND Corporation, vol. 44(2), pages 249-274, June.
    6. Dean S. Karlan & Jonathan Zinman, 2008. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," American Economic Review, American Economic Association, vol. 98(3), pages 1040-1068, June.
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    Cited by:

    1. Cañón, Carlos & Cortés, Edgar & Guerrero, Rodolfo, 2022. "Bank competition and the price of credit: Evidence using Mexican loan-level data," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 56-74.

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    More about this item

    Keywords

    Credit cards; Development finance; Consumer behavior; Mexico;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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