Credit card and payday loan borrowing: Evidence in the SCF 2010–2019

Abstract

Unsecured borrowing plays an important role for consumers in smoothing consumption. Each year , almost 40 using a high-cost payday loan. This paper aims to explore the similarities and differences between both types of borrowers. Using the Survey of Consumer Finances (SCF) from 2010 to 2019, I document that: (1) credit card borrowers are middle-aged, upper-middle-class, with some college exposure, and financially literate; (2) payday loan borrowers are young, low-income and low-wealth, less educated, and less financially literate; and (3) payday loan borrowers lack the financial knowledge of inflation and risk diversification, but not of compound interest. • I document the similarities and differences between credit card and payday loan borrowers using the Survey of Consumer Finances. • Credit card borrowers are middle-aged, upper-middle-class, with some college exposure, and financially literate. • Payday loan borrowers are young, low-income and low-wealth, less educated, and less financially literate. • Although payday loan borrowers are less financially literate, they lack knowledge of inflation and risk diversification, but not of compound interest.