Credit Card Spending Research Articles

Disaggregated Sales and Stock Returns

Using transaction-level credit-card spending from a large U.S. financial institution, we show that disaggregated sales provide accurate and persistent signals of customer demand relevant to a firm’s stock pricing. After controlling for earnings and sales surprises, one interquintile increase in the adjusted customer spending during a firm’s fiscal quarter leads to a 1.5 percentage point increase in the 60-day post–earnings announcement cumulative abnormal return. The predictability concentrates in consumer-oriented firms, especially those relying more on indirect sales distribution channels. We also find a stronger return response to spending from high-FICO-score, high-liquidity, and loyal customers. The transmission speed of disaggregated sales information is slower than that of the earnings information, and small firms or firms far from their end customers exhibit a more delayed price response. Finally, the return implications of adjusted customer spending extend to firms along the production chain. This paper was accepted by Haoxiang Zhu, finance.

Neural mechanisms of credit card spending

Credit cards have often been blamed for consumer overspending and for the growth in household debt. Indeed, laboratory studies of purchase behavior have shown that credit cards can facilitate spending in ways that are difficult to justify on purely financial grounds. However, the psychological mechanisms behind this spending facilitation effect remain conjectural. A leading hypothesis is that credit cards reduce the pain of payment and so ‘release the brakes’ that hold expenditures in check. Alternatively, credit cards could provide a ‘step on the gas,’ increasing motivation to spend. Here we present the first evidence of differences in brain activation in the presence of real credit and cash purchase opportunities. In an fMRI shopping task, participants purchased items tailored to their interests, either by using a personal credit card or their own cash. Credit card purchases were associated with strong activation in the striatum, which coincided with onset of the credit card cue and was not related to product price. In contrast, reward network activation weakly predicted cash purchases, and only among relatively cheaper items. The presence of reward network activation differences highlights the potential neural impact of novel payment instruments in stimulating spending—these fundamental reward mechanisms could be exploited by new payment methods as we transition to a purely cashless society.

College Costs and Credit Cards: How Student Credit Card Use Influences College Degree Attainment

Since the turn of the twenty-first century, going to college has become increasingly financially difficult in the United States. Tuition prices continued to rise, state funding for higher education declined, and the mean family income declined or stagnated for all but the top 20 percent of families (Goldrick-Rab 2016). In a period where college has risen to be the preeminent way Americans can make a better life for themselves, it is becoming more difficult for Americans to pay for college. Financial aid does not cover as much of the price of college as it once did (Goldrick-Rab 2016), and college students are relying on financing methods like student loans more than ever before. Student loans, however, are not the only credit-based financial strategy college students use to pay for college (Manning 2000, 2005). With the explosion of consumer credit access from the 1980s to the 2000s, college students are using credit cards, many times to bridge gaps in their budgets as they try to pay for college. This paper utilizes data from the Education Longitudinal Study (2002–12) to examine the link between college student credit card use and bachelor's degree attainment and demonstrates that college students who carry a balance on their credit card from month to month have a lower likelihood of completing a bachelor’s degree, net of other important factors. Research in the fields of financial counseling and planning, consumer studies, public policy, sociology, and health has explored college student credit card spending behaviors, associated health and educational outcomes, and the influence of family backgrounds on credit card use. This paper extends this existing body of research by considering how college student credit card use influences educational outcomes.

Terrorist Attacks and Strategic Consumption

Using a large representative sample of bank card transactions, this paper examines the impact of terrorist attacks on the household consumption structure choice between credit versus debit accounts. Compared with the baseline period, we document a daily increase of 0.19% more in the fraction of credit card spending out of total card spending for the attack-hit-city consumers than the non-attack-hit city consumers during the three weeks on and after the terrorist attacks. The incremental credit card usage is stronger for consumers who reside close to the attack location and after the attack events with severe outcomes. Consistent with the strategic choice mechanism, the consumption structure adjustment is immediate while not persistent. The adjustment concentrates among consumers with high liquidity constraints, high revolving credit card debt, unstable cash flows, and when the costs of using credit accounts are anticipated in the further future. The adjustment derives from a shift of debit account spending towards credit account spending, and consumers without credit cards do not significantly change their spending. We also document an increase in investments upon the terrorist attacks, driven by the lower-risk savings-related investments. The increased credit card spending ratio manifests in discretionary goods. Overall, our study highlights the real economic impact of terrorist attacks on household consumption through the strategic choice under economic uncertainty.

The ACA Medicaid Expansion in Michigan and Financial Health

AbstractThis article examines how the financial health changes following an individual's enrollment in Michigan's Medicaid program (Healthy Michigan Program, HMP). We use unique data that link credit reports of HMP enrollees to Medicaid administrative data on enrollment and use of healthcare services. We find that Medicaid enrollment is associated with large improvements in several measures of financial health, including reductions in unpaid bills, medical bills, over limit credit card spending, and public records (such as evictions, judgments, and bankruptcies). These improvements are apparent across several subgroups, although individuals with greater medical need, such as those with chronic illnesses, experience the largest benefits.

Timing to the Statement: Understanding Fluctuations in Consumer Credit Use

We show that consumers spend 15% more per day in the first week following the receipt of a credit card statement than in the days just prior to the statement. This increase in spending includes both an increase in the likelihood that they use the credit card in the first weeks following their statement and an increase in transaction amount on days they use the credit card. In contrast to the effect on credit card spending, debit card spending is unaffected by credit card statement issuance, suggesting that consumers are not simply switching among modes of payment. Our estimates are based on exogenous variation from bank-assigned statement dates. We propose and test several alternative explanations to this spending puzzle: optimization of the free float, salience effect of the credit card statement, mental accounting, liquidity constraints, and automatic payments. We find that the consumers most apt to spend early in the credit card cycle tend to be those who do not revolve balances and are not close to their credit limit. Thus, this paper documents a puzzle with mixed support for several alternative explanations. This paper was accepted by David Simchi-Levi, finance.

In the mood to consume: Effect of sunshine on credit card spending

Using a large, representative sample of high-frequency credit card transactions in the United States, this paper examines the causal effect of sunshine-induced mood on contemporaneous household credit card spending. We document a 0.3 percent increase in credit card spending in response to a one-unit increase in the same-day local abnormal sunshine. The spending response is stronger for consumers with higher credit card debt, lower FICO score, and shorter tenure with the bank. The effect manifests in long-term, durable goods spending, and is not driven by other weather conditions, complementarity between sunshine and consumption, or intentional choice of consumption time. We document similar responses of spending on seasonal and non-seasonal goods and during times with high and low sunshine levels. Finally, the sunshine effect occurs among consumers with various characteristics.

Assisting mental accounting using smartphones: Increasing the salience of credit card transactions helps consumer reduce their spending

Credit card-related over-spending represents an important issue for consumers. Over-spending arises in parts from reduced payment transparency compared to cash and other payment methods. Additionally, week-by-week credit card spending exhibits high variance even on an intrapersonal level, which makes it hard to intuitively learn from prior transactions and control one's spending. As mobile-mediated information systems have been proven effective in delivering behavior change interventions, this study investigates the efficacy of using a novel smartphone application that increases the salience of credit card transactions to help consumers control their cashless payments better and ultimately spend less. We implemented a goal-setting feature and provided weekly goal attainment feedback highlighting ordinary, exceptional, or both types of purchases. This work was conducted as a field experiment, studying a large sample of credit card consumers in the wild over several months, which yielded a significant reduction in spending with unobtrusive interventions. It further highlights the importance of including exceptional purchases in households' spending budgets and discusses how people adjusted their consumption to lower their expenditures.

The Real Cost of Political Polarization: Evidence from the COVID-19 Pandemic

This paper examines the role of political factors in mediating the formation of beliefs among individuals and the adoption of regional policies in the United States. First, using comprehensive and nationally representative data on over 47,000 individuals available from March to July, we document that heterogeneity in beliefs about the SARS-CoV-2 pandemic and social distancing behaviors is driven primarily by political affiliation, mattering even more than factors directly connected to the disease, such as individual age and county infections. Second, we examine how political partisanship arising from these differences in beliefs about the virus propagate into the adoption of state policies. The adoption of these nonessential business closures and stay-at-home orders are associated with declines in retail visits, credit card spending, and small business revenue growth, relative to the pre-pandemic trend. In contrast, mask mandates reduce the spread of the virus at least as much and have none of the adverse economic effects. Our results provide evidence in favor of Majoritarian Electoral Democracy theories by showing that the average voter matters, countering the view that politics is driven purely by interest groups and elites.

Consumption and Portfolio Rebalancing Response of Households to Monetary Policy: Evidence of the HANK Channel

This paper tests one specific monetary transmission mechanism through households: portfolio rebalancing. We use a unique panel dataset of household’s credit and debit card spending, ATM withdrawals, financial investments into risky assets such as mutual funds and equities, as well as bank deposits from a leading bank in India to study the impact of the monetary policy pass-through for term depositors. The difference-in-differences estimators show that when interest rate falls, households increase consumption by 2,095 rupees (30 USD) and risky investments by 20,728 rupees (300 USD) after the expiry of term deposits. The increase in risky investment is about 10 times as much as the increase in consumption, suggesting that savers rebalance their portfolio and “reach for yield” when interest rate falls, shifting from safe assets (bank deposits) to more risky assets (mutual funds and equities). We estimate the interest elasticity of consumption to be -1.02 and interest elasticity of risky investments to be -19.5. Furthermore, we find that the effects on consumption and risky investment are larger for households holding term deposits without automatic renewal feature. The consumption effect is larger for those with less liquid wealth and the portfolio rebalancing effect on risky investment is larger for those with more liquid wealth. These results highlight how the heterogeneity in contract design and household wealth affects the monetary policy pass-through.

The Real Impact of FinTech: Evidence from Mobile Payment Technology

We utilize the introduction of a mobile payment technology by the largest bank in Singapore in 2017 to study how mobile payment technology reshapes economic activities and stimulates business creation. After the introduction, business-to-consumer industries witnessed a higher growth rate of business creation by 8.9% per month relative to business-to-business industries, with the effect driven by small firms and more pronounced among industries with a higher cost of cash handling. Underlying this pattern is a strong adoption of mobile payment and a large decline in ATM cash withdrawals during the post-shock period, as well as closure of ATM machines by the bank. The reduced transaction cost also allows consumers to increase their spending capacity, which further fosters business growth. Interestingly, part of the increased consumer demand is captured by credit card spending, which associates with more credit card opening and higher credit limit provision by the bank. We develop a model to rationalize the responses and extend the empirical evidence to understand the key structural parameters that drive the effects of mobile payment technology.

How Does Household Spending Respond to an Epidemic? Consumption During the 2020 COVID-19 Pandemic

We explore how household consumption responds to epidemics, utilizing transaction-level household financial data to investigate the impact of the COVID-19 virus. As the number of cases grew, households began to radically alter their typical spending across a number of major categories. Initially spending increased sharply, particularly in retail, credit card spending and food items. This was followed by a sharp decrease in overall spending. Households responded most strongly in states with shelter-in-place orders in place by March 29th. We explore heterogeneity across partisan affiliation, demographics and income. Greater levels of social distancing are associated with drops in spending, particularly in restaurants and retail.

Factors Affecting Malaysian Millennials in Paying Debt

The purpose of this research is to identify the causes that make Malaysian millennials or fresh graduates face difficulty in repaying their basic debts such as study loans, car loans or rental. Basically, debts can be viewed from different perspective. It can be negative or positive and it depends on the repayment pattern by the debtor itself. Therefore, as a smart millennial, they need to have a good financial knowledge in managing their wealth so that they won’t face any problems in the future. It is because, when they failed to plan, then it means that they will easily fall into bankruptcy and face financial crisis in daily life. Hence, some questions arise, on how fresh graduates manage their income in paying basic expenses such as electricity bills or rental. So, this study is focusing on investigating the factors that affect the ability of Malaysians fresh graduates in repaying debts. Questionnaire has been distributed and collected from 200 respondents which are among fresh graduates and this study tested the relationship between income, personal attitude, financial knowledge, heavy credit card spending, and high cost of living with the ability of fresh graduate in repay the debts.

Macroeconomic Expectations and Credit Card Spending

How do macroeconomic expectations affect consumer decisions? We examine this question using a natural field experiment with 2,872 credit card customers from a large commercial bank. We conduct a survey to measure consumer expectations about future inflation and the nominal exchange rate and combine this with an information-provision experiment that generates exogenous variation in these expectations. We merge the survey and experimental data with detailed administrative data on the subjects' credit card transactions and balances. The experiment is designed to test three standard predictions from models of intertemporal consumption choice: inflation expectations should affect spending on durables; exchange rate expectations should affect spending on tradables; and, holding constant the nominal interest rate, inflation expectations should affect borrowing. We find that the information provided to participants strongly affects subjective expectations. However, we do not find any significant effects on actual consumer behavior (as measured in administrative data) or self-reported consumption plans (as measured in survey data). Our preferred interpretation is that consumers are not sophisticated enough to factor inflation and exchange rate expectations into their consumption decisions. The absence of a link between consumer expectations and behavior has potentially important implications for macroeconomic policies such as forward guidance.

High Frequency Data and a Weekly Economic Index during the Pandemic

This paper describes a weekly economic index (WEI) developed to track the rapid economic developments associated with the onset of and policy response to the novel coronavirus in the United States. The WEI, with its ten component series, tracks the overall economy. Comparing the contributions of the WEI’s components in the 2008 and 2020 recessions reveals differences in how the two events played out at a high frequency. During the 2020 collapse and recovery, it provides a benchmark to interpret similarities and differences of novel indicators with shorter samples and/or nonstationary coverage, such as mobility indexes or credit card spending.

Bank Stress Test Results and Their Impact on Consumer Credit Markets

Using Federal Reserve (Fed) confidential stress test data, we exploit the gap between the Fed and bank capital projections as an exogenous shock to banks and analyze how this shock is transmitted to consumer credit markets. First, we document that banks in the 90th percentile of the capital gap reduce their new supply of risky credit by 13 percent compared with those in the 10th percentile and cut their overall credit card risk exposure on an annual basis. Next, we show that these banks find alternative ways to remain competitive and attract customers by lowering interest rates and offering more rewards and promotions to select groups of borrowers. Finally, we show that consumers at banks with a gap increase their credit card spending and debt payoff and at the same time experience fewer delinquencies. We also show that our results are generalizable to other lending products such as mortgages and home equity. Overall, our results demonstrate a positive feedback loop among credit supply, credit usage, and credit performance due to the stress tests.

Macroeconomic Expectations and Credit Card Spending

How do macroeconomic expectations affect consumer decisions? This paper reports results from a natural field experiment with 2,872 credit card customers from a large commercial bank to answer this question. Participants of the experiment first completed as survey that measured consumer expectations about future inflation and the nominal exchange rate. This survey was combined with an information-provision experiment that generated exogenous variation in respondents’ macroeconomic expectations. The survey and experimental data were then merged with detailed administrative data on participants’ credit card transactions and balances. The experiment was designed to test three standard predictions from models of intertemporal consumption choice: inflation expectations should affect spending on durables; exchange rate expectations should affect spending on tradables; and, holding constant the nominal interest rate, inflation expectations should affect borrowing. The analysis finds that the information provided to participants strongly affects subjective expectations. However, no significant effects are found on actual consumer behavior (as measured in administrative data) or self-reported consumption plans (as measured in survey data). The preferred interpretation is that consumers are not sophisticated enough to factor inflation and exchange rate expectations into their consumption decisions. The absence of a link between consumer expectations and behavior has potentially important implications for macroeconomic policies such as forward guidance.

Determinants of credit card spending and debt of Chinese consumers

PurposeThe rapid growth of credit card use in China poses the potential for card overuse and the accumulation of increased debt. The purpose of this paper is to report on an investigation into the determinants of overall credit card spending and card-financed debt by Chinese consumers.Design/methodology/approachThis study focusses on two dependent variables: credit card monthly spending and card debt. The spending measure is based on consumer outlay for the month preceding the survey. Card debt is the consumers’ outstanding credit card debt when the survey was conducted. Three groups of independent measures are used: socio-demographic characteristics, card features and consumer attitude towards money. Both card spending and card debt are estimated with OLS methods. Data was obtained from the 2013 China Household Finance Survey of 1,920 households in 29 provinces and 262 counties across China that used credit cards over the survey period.FindingsThe empirical findings suggest consumers’ attitude towards money is more important in explaining card spending and debt variation than socio-demographic characteristics and card features. The credit limit set for a card, obligations to other loans and the method of paying for ordinary shopping exhibit positive effects on both card spending and card debt, while age exhibits a negative effect. Further, card spending is positively correlated with card debts, but the factors that determine card spending do not necessarily affect card debt and vice versa. Minimum card debt payments, cash advances, card tenure and interest-bearing debt have no effect on card spending but have positive effects on card debt. In addition, gender and income have opposite effects on card spending and debt.Practical implicationsThe relationships we have documented suggest several actions the Chinese Government could consider dealing with credit card debt risk. Controlling the aggressive promotional campaigns that card issuers use to attract consumers and aggressive credit policies should be a focus of attention. The Chinese Government might, for example, impose minimum age and income requirements for granting credit cards and prohibit issuance of new cards to applicants who are already in debt with other types of credit. In addition, more stringent criteria to curb increases in card limits and tighter control over cash advances made on cards should be applied. Minimum payment amounts can also be increased in order to reduce credit card debt risk.Originality/valueDespite ample documentation of consumers’ credit card behaviour, the literature is deficient in at least two areas of enquiry. First, most previous research has investigated either credit card spending behaviour or card debt, but not both. Second, with few exceptions, most research has investigated a range of specific factors that affect credit card use. In contrast, this study investigates card spending as well as card debt behaviour using a wide variety of consumer dimensions particularly relevant to credit card use and resulting debt. In addition, this study focusses on Chinese consumers, who traditionally prefer to save first and delay spending. The impact of the rapid growth of credit card use on this traditional Chinese orientation towards spending is dynamic. Documenting the influence of the individual factors examined in this study is likely to be of value to both policy makers and institutions that offer and manage credit in this changing environment.

Mortgage Debt, Hand-to-Mouth Households, and Monetary Policy Transmission

Using a representative sample of credit card holders from a Chinese commercial bank with a 10% credit card market share, we investigate how consumers respond to an unexpected interest rate decrease that automatically reduces interest expenses for all mortgagors in the country and thereby generates significant positive disposable-income shocks. Our difference-in-differences analysis shows that compared with homeowners without mortgage obligations, mortgagors increased their monthly credit card spending by 7.2% after the 230bps mortgage rate reduction announced in September 2008. We find a significant spending response both immediately after the announcement and during the post-reset period. The credit card delinquency rate also decreased after the mortgage rate reset. Subsequent to an interest-rate-increase episode, mortgagors symmetrically reduced their credit card spending. Hand-to-mouth consumers experienced a pronounced spending increase, even among those with a high credit limit, and their response was concentrated in the post-reset period. The debt-service channel plays an important role in transmitting monetary policy—our estimate implies a marginal propensity to consume (MPC) of 0.40-0.51 through credit card spending.

Credit Cards, Consumer Credit, and Bankruptcy

This paper analyzes the effects of credit card use on broader economic indicators, specifically consumer credit, and consumer bankruptcy filings. Using aggregate nation-level data from Australia, Canada, Japan, the United Kingdom, and the United States, I find that credit card spending, lagged by 1-2 years, has a strong positive effect on consumer credit. Finally, I find a strong relation between credit card debt, lagged by 1-2 years, and bankruptcy, and a weaker relation between consumer credit, lagged by 1-2 years, and bankruptcy. The relations are robust across a variety of different lags and models that account for problems of multicollinearity and auto-correlation in the time series and include variables to control for the effects of economic cycles on bankruptcy and dummy variables to isolate nation-specific effects