Effects of teaser rates on new credit card customers’ spending and borrowing: an empirical analysis

Abstract

PurposeThis study examines the effect of credit card teaser rates on consumer indebtedness and the revenue generated by new customers.Design/methodology/approachA unique dataset from a national bank in the United States of America is utilized to employ a relatively new method called the covariate balancing propensity score matching, which measures the causal effects of teaser rates.FindingsThe results indicate that offering teaser rates improves the revenue generated by customers by indirectly increasing indebtedness. Such offers increase customers' willingness to borrow at regular interest rates that are significantly higher than the teaser rate – the “spillover effects.” Interestingly, customers who pay off their promotional balances before the termination of the promotional period borrow even more at regular rates than customers who do not pay off their balances timely.Practical implicationsThe results can assist managers of credit card companies in measuring the value of teaser rates more accurately. Furthermore, the results have implications for public policy aimed at reducing credit card debt by enhancing the understanding of credit card customers' borrowing behavior.Originality/valueTo the authors' knowledge, this is the first study that documents the direct and indirect impacts of teaser rates on credit card customers' borrowing behavior and the resulting bank revenue.