Do Consumers Choose the Right Credit Contracts?

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Finance Papers
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banks
depository institutions
micro finance institutions
mortgages
Portfolio Choice
investment decisions
Economics
Finance
Finance and Financial Management
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Agarwal, Sumit
Chomsisengphet, Souphala
Liu, Chunlin
Souleles, Nicholas S
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Abstract

We analyze an experiment conducted by a large U.S. bank that offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate. We find that on average consumers chose the credit contract that minimized their costs. A substantial fraction of consumers (about 40%) still chose the suboptimal contract. Nonetheless, the probability of choosing the suboptimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors are more likely to subsequently switch to the optimal contract.

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2015-09-01
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The Review of Corporate Finance Studies
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