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Effects of credit scores on consumer payment choice

  • Fumiko Hayashi
  • Joanna Stavins

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.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 12-03.

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Date of creation: 2012
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Handle: RePEc:fip:fedkrw:rwp12-03
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  1. 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 S65-S114, December.
  2. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
  3. Ching, Andrew & Hayashi, Fumiko, 2008. "Payment Card Rewards Programs and Consumer Payment Choice," MPRA Paper 8458, University Library of Munich, Germany.
  4. Nicole Jonker, 2005. "Payment Instruments as Perceived by Consumers - a Public Survey," DNB Working Papers 053, Netherlands Central Bank, Research Department.
  5. Ron Borzekowski & Elizabeth K. Kiser & Shaista Ahmed, 2006. "Consumers' use of debit cards: patterns, preferences, and price response," Finance and Economics Discussion Series 2006-16, Board of Governors of the Federal Reserve System (U.S.).
  6. 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.
  7. John Simon & Kylie Smith & Tim West, 2009. "Price Incentives and Consumer Payment Behaviour," RBA Research Discussion Papers rdp2009-04, Reserve Bank of Australia.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
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