Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles? / Sumit Agarwal, Paige M. Skiba, Jeremy Tobacman.

Format:

Book

Author/Creator:

Agarwal, Sumit.

Contributor:

National Bureau of Economic Research.

Skiba, Paige M.

Tobacman, Jeremy.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14659.

NBER working paper series no. w14659

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Payday Loans and Credit Cards

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

Using 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.

Notes:

Print version record

January 2009.