Effects of credit scores on consumer payment choice

Anecdotally, a negative relationship between the use of debit cards and credit scores has been reported: Consumers with lower credit scores use debit cards more intensively than those with higher credit scores. However, it is not clear whether credit scores have real effects on consumer payment choice or whether the negative relationship is caused by other factors, such as education or income. ; If credit scores have real effects, a negative relationship between debit card use and credit scores could imply supply-side effects, demand-side effects, or a combination of both. If credit scores significantly influence consumer access to credit cards, credit limit, 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 consumer tastes and preferences for payment methods, then the negative relationship is likely due to demand-side effects. ; In this paper, we investigate the effects of credit scores on consumer payment behavior, especially on debit and credit card use. Because we find that credit scores have real effects, we investigate what credit scores imply. Preliminary evidence strongly suggests that supply-side factors play an important role in the cost of credit and in access to credit.