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

54 Pages Posted: 17 May 2013

See all articles by Victor Stango

Victor Stango

UC Davis Graduate School of Management

Jonathan Zinman

Dartmouth College; Innovations for Poverty Action; Jameel Poverty Action Lab; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2013

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.

Keywords: credit cards, search costs, credit scoring, household finance

JEL Classification: L1, G2, D1

Suggested Citation

Stango, Victor and Zinman, Jonathan, Borrowing High vs. Borrowing Higher: Sources and Consequences of Dispersion in Individual Borrowing Costs (May 16, 2013). Available at SSRN: https://ssrn.com/abstract=2266054 or http://dx.doi.org/10.2139/ssrn.2266054

Victor Stango (Contact Author)

UC Davis Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

Jonathan Zinman

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-0075 (Phone)

HOME PAGE: http://https://sites.dartmouth.edu/jzinman/

Innovations for Poverty Action

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Jameel Poverty Action Lab

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National Bureau of Economic Research (NBER)

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United States

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