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Credit card interest rates and risk: new evidence from US survey data

Liñares-Zegarra, José and Wilson, John OS (2014) 'Credit card interest rates and risk: new evidence from US survey data.' The European Journal of Finance, 20 (10). 892 - 914. ISSN 1351-847X

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Abstract

This study uses survey data and instrumental variables’ methods to assess whether in the USA the prices of credit cards (annual percentage rates, APRs) reflect the short- and long-term risks of cardholders (measured as unpaid credit card debt in the previous year, outstanding debt and Fair Issac Corporation score). We find a negative relationship between APRs and long-term risk. This effect is pronounced for sub-prime cardholders. This suggests that higher risk consumers shop around more intensively for credit cards offering the best terms and conditions. However, under stressed economic conditions, issuer banks increase APRs to account for short-term risk. Credit card characteristics, including network affiliation and issuer brand, play an important role in the pricing decisions of issuer banks.

Item Type: Article
Uncontrolled Keywords: credit card plans, instrumental variables, pricing, risk, search
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jose Linares Zegarra
Date Deposited: 08 Sep 2016 13:42
Last Modified: 26 Mar 2019 14:15
URI: http://repository.essex.ac.uk/id/eprint/17497

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