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Effects of credit scores on consumer payment choice

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  • Fumiko Hayashi
  • Joanna Stavins

Abstract

This paper investigates the effects of credit scores on consumer payment behavior, especially on debit and credit card use. Anecdotally, a negative relationship between debit card use and credit score has been reported; however, it is not clear whether that relationship is related to other factors, such as education or income, or whether it is a mere correlation. We use a new consumer survey dataset to examine whether this negative relationship holds after controlling for various consumer characteristics, including demographic and financial characteristics, consumers' perceptions toward payment methods, and card reward status. The results based on a single-year survey as well as on panel data suggest that there is a significant negative relationship between debit card use and credit score even after controlling for various characteristics. We supplement the analysis with evidence from Equifax data. The results indicate that an increase in consumers' cost of debit cards—in response to regulatory changes, for example—would have an adverse effect on low-credit-score consumers (typically those with lower incomes and less education). ; We then investigate what credit score implies. If credit score significantly influences consumer access to credit cards, credit limits, or the cost of credit cards, then the negative relationship likely results from supply-side constraints. If a lower credit score is associated with differences in underlying preferences, then the negative relationship is likely due to demand-side effects. Preliminary evidence strongly suggests that supply-side factors play an important role in the cost of credit and in access to credit.

Suggested Citation

  • Fumiko Hayashi & Joanna Stavins, 2012. "Effects of credit scores on consumer payment choice," Public Policy Discussion Paper 12-1, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbpp:12-1
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    References listed on IDEAS

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    1. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
    2. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters,in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
    3. Robert B. Avery & Kenneth P. Brevoort & Glenn Canner, 2012. "Does Credit Scoring Produce a Disparate Impact?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40, pages 65-114, December.
    4. Simon, John & Smith, Kylie & West, Tim, 2010. "Price incentives and consumer payment behaviour," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1759-1772, August.
    5. Hayashi Fumiko & Klee Elizabeth, 2003. "Technology Adoption and Consumer Payments: Evidence from Survey Data," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-16, June.
    6. Marc Rysman, 2006. "An Empirical Analysis of Payment Card Usage," Boston University - Department of Economics - Working Papers Series WP2006-002, Boston University - Department of Economics.
    7. Schuh, Scott & Stavins, Joanna, 2010. "Why are (some) consumers (finally) writing fewer checks? The role of payment characteristics," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1745-1758, August.
    8. Nicole Jonker, 2005. "Payment Instruments as Perceived by Consumers - a Public Survey," DNB Working Papers 053, Netherlands Central Bank, Research Department.
    9. Ron Borzekowski & K. Kiser Elizabeth & Ahmed Shaista, 2008. "Consumers' Use of Debit Cards: Patterns, Preferences, and Price Response," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 149-172, February.
    10. Ching, Andrew T. & Hayashi, Fumiko, 2010. "Payment card rewards programs and consumer payment choice," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1773-1787, August.
    11. Brian Mantel, 2000. "Why do consumers pay bills electronically? an empirical analysis," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 32-48.
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    Cited by:

    1. Fumiko Hayashi, 2013. "The new debit card regulations: effects on merchants, consumers, and payments system efficiency," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 89-118.
    2. Dotsey, Michael & Guerron-Quintana, Pablo A., 2016. "Interest rates and prices in an inventory model of money with credit," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 71-89.

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