Contract Terms, Employment Shocks, and Default in Credit Cards

The tension between limiting default rates and expanding financial access in developing countries is particularly acute for credit card borrowing, which is increasingly how borrowers access formal credit. Concerns over high default rates have led to contract-term restrictions such as higher minimum payments and interest rate ceilings, despite limited evidence on their effectiveness. We use a nationwide RCT to study new borrower responses to large experimental contract-term changes for a card that accounted for 15% of all first-time formal loans in Mexico. We find default is high and unresponsive to even large interest rate declines for the newest borrowers, and that a doubling of the required minimum payment does not reduce default. Matching the experimental subjects to their administrative employment histories, we find that unemployment shocks are common for newer borrowers and that plausibly exogenous job separation shocks have large effects on default.