Do Credit Card Companies Screen For Behavioral Biases?

Résumé

We analyze the supply side of credit card markets, and the pricing and marketing strategies of issuers. First, card issuers target less-educated customers with more steeply back-loaded and hidden fees (e.g. higher late and over-limit fees). Second, issuers use rewards programs to screen for unobservable borrower types. Finally, we use increases in state-level unemployment insurance (UI) as positive shocks to creditworthiness and show that issuers rely more on back-loaded (hidden) fees when UI increases, especially for less-educated customers. This result documents a novel trade-off: card issuers weigh short-term fee maximization against increases in credit risk, when using back-loaded fees.