Explaining changes in the US credit card market: Lenders are using more information

Andrew Davis, Jiseob Kim

Research output: Contribution to journalArticle

Abstract

We examine two changes in the cross-sectional distribution of credit card contracts over time: the increasing variance in interest rates and the increasing variance in credit limits, using data from the 1989–2013 Survey of Consumer Finances. Within this dataset, we show that financial institutions seem to be collecting and using more consumer information when extending credit. We then develop a life-cycle model of lending using a novel contract structure reflecting modern credit cards, where interest rates and credit limits are jointly determined before actual borrowing takes place. Within the model, giving lenders more information on consumers generates realistic results along several dimensions. More information leads to better pricing, moving the market from a ‘pooling’ to a ‘separating’ equilibrium, generating the observed increase in variances, with the gains primarily going to young agents.

Original languageEnglish
Pages (from-to)76-92
Number of pages17
JournalEconomic Modelling
Volume61
DOIs
Publication statusPublished - 2017 Feb 1

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Credit cards
Credit
Interest rates
Consumer information
Lending
Separating equilibrium
Life-cycle model
Financial institutions
Borrowing
Consumer finance
Pricing
Pooling

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

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Explaining changes in the US credit card market : Lenders are using more information. / Davis, Andrew; Kim, Jiseob.

In: Economic Modelling, Vol. 61, 01.02.2017, p. 76-92.

Research output: Contribution to journalArticle

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