Does Promoting Cheaper Credit Spur Household Refinancing in the Short-Term Credit Market?

Abstract

We analyze how a bank letter that promotes a credit line as the cheaper alternative to overdrafts affects individuals' credit behavior and whether individuals substitute from overdrafts to credit lines. The data are from a large German direct bank that sends this letter to customers who use overdrafts. At the same time, the bank also randomly selects a control group. Based on this field experiment, we show that the letter has a positive impact on credit line demand, at least in the short-term. Individuals who receive the letter also increase overdraft usage and debt levels relative to the control group. Although the small fraction of individuals who open a credit line reduces overdrafts temporarily, they borrow more than necessary to balance their checking accounts. For these individuals, the results are consistent with a strong preference for immediate consumption due to high implied discount rates or self-control problems.

Keywords: Consumer debt, overdrafts, limited attention, consumption, financial regulation

JEL Classification: D14, D18, G02, G21