Explaining changes in the US credit card market: Lenders are using more information |
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| Affiliation: | 1. Department of Economics, Acadia University, Canada;2. School of Economics, Yonsei University, South Korea;1. School of Economics and Management, Tongji University, Shanghai 200092, China;2. School of Mathematical Sciences, Liaocheng University, Liaocheng 252059, China;1. Sorbonne Paris Cité, Université Paris Diderot, Service de Dermatologie, AP-Hp Hôpital Saint-Louis, INSERM UMR 1163, Institut Imagine, Paris, France;1. Alma Mata Working Group, London SW4 7TU, UK;2. Clinical Research Department, London School of Hygiene & Tropical Medicine, London, UK;1. Indian Statistical Institute, Statistics and Mathematics Unit, 8th Mile, Mysore Road, Bangalore 560059, India;2. Department of Mathematics and Statistics, Fylde College, Lancaster University, Lancaster LA1 4YF, UK |
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| 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. |
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| Keywords: | G1 Personal finance Credit cards Unsecured credit Lending Financial information |
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