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Payday Loans and Credit Cards

dc.contributor.authorSkiba, Paige Marta
dc.contributor.authorAgarwal, Sumit
dc.contributor.authorTobacman, Jeremy
dc.identifier.citation99 AEA Papers and Proceedings 412 (2009)en_US
dc.descriptionarticle published in an economic reviewen_US
dc.description.abstractUsing a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. First, more specifically, we assess consumers' effectiveness at prioritizing use of their lowest-cost credit option. We find that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans. This is costly because payday loans have annualized interest rates of at least several hundred percent, though perhaps partly explained by the fact that borrowers have experienced substantial declines in credit card liquidity in the year leading up to the payday loan. Second, we show that FICO scores and Teletrack scores have independent information and are specialized for the types of lending where they are used. Teletrack scores have eight times the predictive power for payday loan default as FICO scores. We also show that prime lenders should value information about their borrowers' subprime activity. Taking out a payday loan predicts nearly a doubling in the probability of serious credit card delinquency over the next year.en_US
dc.format.extent1 PDF (8 pages)en_US
dc.publisherAmerican Economic Review: Papers and Proceedingsen_US
dc.subjectpayday loansen_US
dc.subjectcredit cardsen_US
dc.subjectliquidity puzzlesen_US
dc.subjecthousehold financeen_US
dc.subjectcredit scoresen_US
dc.subjectpersonal financeen_US
dc.subject.lcshbanking lawen_US
dc.subject.lcshfinance - law and legislationen_US
dc.titlePayday Loans and Credit Cardsen_US
dc.title.alternativeNew Liquidity and Credit Scoring Puzzles?en_US

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