Comments on the PowerPoint Presentation of Who Makes Credit Card Mistakes?

1. Comments on the PowerPoint Presentation ofWho Makes Credit Card Mistakes? Katherine Samolyk FDIC Presented at the FDIC 2006 Fall Workshop, Washington D.C. These comments reflect my views not those of the FDIC or its Board

2. Overview of the Research Presented • Studies “financial mistakes” in credit card usage—high-cost borrowing while holding low-interest-bearing deposits. • Looks at of who makes these ”credit card mistakes”? (Income, education, unemployed, immigrant status, credit score) • Uses proprietary data for a single depository institution on credit card balances and deposit account balances to examine how demographic characteristics of bank customers are related to “borrowing high-lending low” (BHLL) behavior associated with simultaneously having interest –bearing credit card debt and low yielding bank deposits).

3. Conceptual Backdrop • What is the explicit cost of holding low-interest-bearing but liquid bank deposits while you are financing expenditures using relatively expensive credit card debt? • Zinman (2006) • Unadjusted Wedge= min [Credit Card Debt, Demand Deposits] • Unadjusted COST=max[0, Unadjusted Wedge*(r_card-r_dep)]

4. Conceptual Backdrop • Discuss why people might make these “mistakes” --Distinction between nonstandard behavior vs nonstandard preferences • Low Education causing mistakes is example of nonstandard behavior—don’t know better • Different from “nonstandard preferences” (i.e. behavioral-psych explanations) • Very important question in consumer finance because the answer has very different policy implications--- • Mistakes because of nonstandard preferences -- policies regarding the provision of financial services that elicit optimal behavior (behavioral economics) • Mistakes because of not knowing something can be corrected by financial education.

5. Conceptual Backdrop But is the behavior really a mistake? Portfolio management problem --asset and debt management under liquidity constraints Transactions management—incoming and outgoing payments BHLL may not always represent either a mistake or weird preferences if there are costs and frictions in household portfolio and payments decisions Rational - Precautionary Balances—to avoid costs Zinman , 2006 Telyukova and Wright, 2006

6. What are the costs of not having deposit balances? • Various deposit account fees associated with not having some minimum balance; • Costs of not making payments; NSF fees, late payment fees; returned check fees; other pecuniary and nonpecuniary costs of nonpayment • Other forms of short-term borrowing—payday loans; fee- based overdraft protection; • the costs / benefits depends on: • Customer expenditure/payment patterns; and the means of payment used to make transactions • Customer wealth; the composition of wealth (liquidity); investment opportunities; other sources of credit (home equity);

7. Data and Methodology • Match (1) Credit Card Monthly Statement Data with (2) Deposit Account Monthly Statement Data; 100,000 customers--19 months of data (not independent observations for a given customer) • Use proxies for customer characteristics: Canadian census data on Income; Education; Unemployment; House Ownership; Immigrant Status • Match each consumer’s postal code (50 or so households) with appropriate “dissemination area” in the Canadian Census Data (Average from ~200 Households) • Ask whether/how economic and demographic variables in the DA where customers live are related to the simultaneous use of credit card debt and deposit holdings

8. Data and Methodology • Dependent variables • Proportion of Months that a consumer BHLLs ---20 possible proportions (mostly 0s or 1s) • Proportion of Months that each consumer BHLLs measured net of “Precautionary Balances”—e.g. holds balances in excess of 1 std deviation of balances • 20 possible outcomes (mostly 0s or 1s) • How is this measured—fluctuations in each customers daily balances or in end-of-month statement balance? • Consumer is Delinquent or Over limit on Credit Card – but still hasdeposits that could pay outstanding Credit Card debt (two outcomes; 0 or 1)

9. Results Less BHLL BEHAVIOR • % University Grad (All 3 models) what is the omitted group? fewer “less than high school”? • % Own House (All 3 models) fewer renters • %Immigrant-Dev Countries (2 models) fewer nonimmigrants ? • Higher Income (1 model) • Higher credit score (all three models) Greater BHLL BEHAVIOR • %High School Only (All 3 models) what is the omitted group? • %Some Post Sec (All 3 models) fewer “less than high school”? • % Renters (All 3 models) fewer homeowners • %Nonimmigrants (2 models) fewer DC immigrants • Lower income (1 model) • Lower credit score (all three models)

10. Issues/Questions Questions about how “mistakes” are quantified: • Can you observe all of the credit card debt owed by each depositor (cards from other issuers?) • How is “debt” measured from monthly statement ? • Do you exclude customers that don’t have a credit card with bank from the empirical tests since they can’t BHLL? • Are you including saving accounts and checking accounts? • How are “deposits” measured from the monthly statement—minimum balance, average balance, month end balance? • Are deposit balances and credit card debt measured on the same day?

11. Suggestions Could do more to try to quantify the costs of BHLL behavior • Dependent variables not capturing magnitudes and attendant costs of BHLL behavior – • If balance are so low –not worth using them to pay off debt • Can you estimate the costs from your data? • Would make dependent variable more continuous Interesting to try to do more to understand BHLL behavior • Are there seasonal patterns (Christmas time) • Interesting information about customer deposit and transaction/expenditure patterns in monthly statements • Does your data have details on the timing and composition of deposits and expenditures ? • Could be used to further understand this type of consumer financing behavior---e.g. are the mistakes satisfying minimum balance requirements—? Look forward to reading the paper!