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Borrowing High vs. Borrowing Higher: Sources and Consequences of Dispersion in Individual Borrowing Costs

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  • Victor Stango
  • Jonathan Zinman

Abstract

We document cross-individual variation in U.S. credit card borrowing costs (APRs) that is large enough to explain substantial differences in household saving rates. Borrower default risk and card characteristics explain roughly 40% of APRs. The remaining dispersion exists because a borrower can receive offers and hold cards with wide-ranging APRs, as different issuers price the same observable risk metrics quite differently. Borrower debt (mis)allocation across cards explains little dispersion. But self-reported borrower search/shopping (along with instruments for shopping implied by Fair Lending law) can explain APR differences comparable to moving someone from the worst credit score decile to the best.

Suggested Citation

  • Victor Stango & Jonathan Zinman, 2013. "Borrowing High vs. Borrowing Higher: Sources and Consequences of Dispersion in Individual Borrowing Costs," NBER Working Papers 19069, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19069
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    References listed on IDEAS

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    1. Irina A. Telyukova, 2013. "Household Need for Liquidity and the Credit Card Debt Puzzle," Review of Economic Studies, Oxford University Press, vol. 80(3), pages 1148-1177.
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    Cited by:

    1. Florian Deuflhard & Dimitris Georgarakos & Roman Inderst, 2019. "Financial Literacy and Savings Account Returns," Journal of the European Economic Association, European Economic Association, vol. 17(1), pages 131-164.
    2. Song Han & Benjamin J. Keys & Geng Li, 2015. "Information, Contract Design, and Unsecured Credit Supply: Evidence from Credit Card Mailings," Finance and Economics Discussion Series 2015-103, Board of Governors of the Federal Reserve System (U.S.).
    3. Jonathan DE QUIDT & Maitreesh GHATAK, 2018. "Is The Credit Worth It? For-Profit Lenders In Microfinance With Rational And Behavioral Borrowers," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 89(1), pages 175-199, March.
    4. Sumit Agarwal & John Grigsby & Ali Hortaçsu & Gregor Matvos & Amit Seru & Vincent Yao, 2020. "Searching for Approval," NBER Working Papers 27341, National Bureau of Economic Research, Inc.
    5. repec:bla:annpce:v:89:y:2018:i:1:p:175-199 is not listed on IDEAS
    6. Dawsey, Amanda E., 2015. "State bankruptcy laws and the responsiveness of credit card demand," Journal of Economics and Business, Elsevier, vol. 81(C), pages 54-76.

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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