Abstract
The use of the credit card is one of the most popular payment methods and the most convenient sources of finance all over the world. In the last 30 years, enormous technological changes, such as the introduction of the ATM and e-banking, have allowed the rapid development of credit card use. According to the earnings report of Visa Inc. (http://investor.visa. com/phoenix.zhtml?c=215693&p=quarterlyearnings), the quarter ending 31 March 2013 reports a total volume (payment and cash volume) in the Visa credit program of nearly US$700 billion, with a growth rate of 10.2 per cent (constant USD). In the United States, the average credit cardholder has 3.7 credit cards as of 2009 (Foster et al., 2011). The average US household owes $7128 on their credit cards as of October 2013 (www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/). Credit card debt is the third largest source of household indebtedness in the United States behind mortgages and student loan debt.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Agarwal, S., Chomsisengphet, S., Liu, C. and Souleles, N.S. (2007) Do consumers choose the right credit contracts? Chicago, IL: Federal Reserve Bank of Chicago, December. Working Paper.
Agarwal, S., Driscoll, J., Gabaix, X. and Liabson, D. (2009) The age of reason: Financial decisions over the life cycle and implications for regulation. Brookings Papers on Economic Activity Fall 2009: 51–101.
Agarwal, S., Skiba, P. and Tobacman, J. (2009) Payday loans and credit cards: New liquidity and credit scoring puzzles? The American Economic Review 99(2): 412–417.
Agarwal, S. and Mazumder, B. (2010) Cognitive ability and household financial decision making. Federal Reserve Bank of Chicago. Working Paper No. 2010–16.
Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S. and Evanoff, D. (2010a) Financial counseling, financial literacy, and household decision making. Pension Research Council. Working Paper No. 2010–34.
Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S. and Evanoff, D. (2010b) Learnig to cope: Voluntary financial education programs and loan performance during a housing crisis. American Economic Review: Papers and Proceedings 100(2): 495–500.
Australia and New Zealand Banking Group (2004) Making a difference to financial literacy: A review of ANZ’s financial literacy program, http://www.anz.com/resources/2/8/284e81004fld3e80a555b558b54e5b8d/Making-Difference-Financial-Literacypdf?MOD=AJPERES.
Ausubel, L. (1991) The failure of competition in the credit card market. The American Economic Review 81(1): 50–81.
Asubel, L. (1999) Adverse selection in the credit card market. MD: University of Maryland, 17 June. Working Paper.
Barron, J.M. and Staten, M.E. (2009) Is technology-enhanced credit counseling as effective as in person delivery?, Presented at the Networks Financial Institute at Indiana State University Conference: Improving Financial Literacy and Reshaping Financial Behavior, 14–15 May, Indianapolis.
Benjamin, D.J., Brown, S.A. and Shapiro, J.M. (2013) Who is ‘behavioral’? Cognitive ability and anomalous preferences. Journal of European Economic Association 11(6): 1231–1255.
Bernheim, B.D. (1988) Social security benefits: An empirical study of expectations and realization. In: R. Ricardo-Campbell and E.P. Lazear (eds.) Issues in Contemporary Retirement. Stanford, CA: Hoover Institution Press, pp. 312–345.
Bertaut, C, Haliassos, M. and Reiter, M. (2009) Credit card debt puzzles and debt revolvers for self control. Review of Finance 13(4): 657–692.
Borden, L., Lee, S., Serido, J. and Collins, D. (2008) Changing college students’ financial knowledge, attitudes, and behavior through seminar participation. Journal of Family and Economic Issues 29(1): 23–40.
Brito, D. and Hartley, P. (1995) Consumer rationality and credit cards. Journal of Political Economy 103(2): 400–433.
Calem, P. and Mester, L. (1995) Consumer behavior and the stickiness of credit card interest rates. The American Economic Review 85(5): 1327–1336.
Calem, P., Gordy M. and Mester, L. (2006) Switching cost and adverse selection in the market for credit cards: New evidence. Journal of Banking and Finance 30(6): 1653–1685.
Cargill, T. and Wendel, J. (1996) Bank credit cards: Consumer irrationality versus market forces. The Journal of Consumer Affairs 30(2): 373–389.
Chen, H. and Volpe, R.P. (1998) An analysis of personal financial literacy among college students. Financial Services Review 7(2): 107–128.
Chien, Y. and DeVaney S.A. (2001) The effects of credit attitude and socioeconomic factors on credit card and installment debt. The Journal of Consumer Affairs 35(1): 162–179.
Conkey C. (2007) Credit card issues on the spot. Wall Street Journal 25(January): A4.
DellaVigna, S. and Malmendier, U. (2004) Contract design and self-control: Theory and evidence. The Quarterly Journal of Economics 119(2): 353–402.
Durkin, T.A. (2000) Credit cards: Use and consumer attitudes, 1970–2000. Federal Reserve Bulletin (September): 623–634.
Elliehausen, G. E., Lundquist, C. and Staten, M.E. (2007) The impact of credit counseling on subsequent borrower behavior. Journal of Consumer Affairs 41(1): 1–28.
Estelami, H. (2009) Cognitive drivers of suboptimal financial decisions: Implications for financial literacy campaigns. Journal of Financial Services Marketing 13(4): 273–283.
Foster, K., Meijer, E., Schuh, S. and Zabek, M.A. (2011) The 2009 Survey of Consumer Payment Choice. Federal Reserve Bank of Boston Public Policy Discussion Papers, No 11–1.
Fox, J., Bartholomae, S. and Lee, J. (2005) Building the case for financial education. The Journal of Consumer Affairs 39(1): 195–214.
Frederick, S. (2005) Cognitive reflection and decision making. Journal of Economic Perspectives 19(4): 25–42.
Gabaix, X. and Laibson, D. (2006) Shrouded attributes, consumer myopia, and information suppression in competitive markets. The Quarterly Journal of Economics 121(2): 505–540.
Ganzach, Y. and Karsahi, N. (1995) Message framing and buying behavior: A field experiment. Journal of Business Research 32(1): 11–17.
Grinblatt, M., Keloharju, M. and Linnainmaa, J. (2011) IQ and stock market participation. The Journal of Finance 66(6): 2121–2164.
Gross, D. and Souleles, N. (2002) Do liquidity constraints and interest rates matter for consumer behavior? Evidence from credit card data. The Quarterly Journal of Economics 117(1): 149–185.
Grubb, M.D. (2009) Selling to overconfident consumers. American Economic Review 99(5): 1770–1807.
Gustman, A.L. and Steinmeier, TL. (2005) Imperfect knowledge of social security and pensions. Industrial Relations 44(2): 373–397.
Haliassos, M. and Reiter, M. (2005) Credit card debt puzzles, Goethe University Frankfurt, 2 November. Working Paper.
Harris, C. and Laibson, D. (2001) Hyperbolic discounting and consumption. In: M. Dewatripont, L.P. Hansen and S.J. Turnovsky (eds.) Advances in Economics and Econometrics. Cambridge, UK: Cambridge University Press, Vol. 1, pp. 258–297.
Hartarska, V. and Gonzalez-Vega, C. (2005) Credit counselling and mortgage termination by low-income households. Journal of Real Estate Finance and Economics 30(3): 227–243.
Hayhoe, C.R., Leach, L.J., Turner, P.R., Bruin, M.J. and Lawrence, F.C. (2000) Differences in spending habits and credit use of college students. The Journal of Consumer Affairs 34(1): 113–133.
Hilgert, M. and Hogarth, J. (2002) Financial Knowledge, experience and learning preferences: Preliminary results from a new survey on financial literacy. Consumer Interest Annual 48.
Hilgert, M.A., Hogarth, J.M. and Beverly, S.G. (2003) Household financial management: The connection between knowledge and behavior. Federal Reserve Bulletin (July): 309–322.
Hirad, A. and Zorn, P. (2002) A little knowledge is a good thing: Empirical evidence of the effectiveness of pre-purchase homeownership counseling. In: N. Retsinas and E. Belsky (eds.) Low-income Homeownership: Examining the Unexamined Goal. Washington DC: Joint Center for Housing Studies, Brookings Institution Press, pp. 146–174.
Hogarth, J.M. (2006) Financial education and economic development. Presented at the Improving Financial Literacy: International Conference hosted by the Russian G8 Presidency in cooperation with the OECD, 29–30 November, Moscow, Russian Federation.
Hynes, R.M. (2004) Overoptimism and overborrowing. Brigham Young University Law Review 1: 127–168.
Kahneman, D. and Tversky A. (1996) On the reality of cognitive illusions. Psychological Review 103(3): 582–591.
Kim, H. and Kim, J.H. (2010) Information search for retirement plans among financially distressed consumers. Journal of Family and Economic Issues 31(1): 51–62.
Lee, J. and Hogarth, J. (2000) Relationship among information search activities when shopping for a credit card. The Journal of Consumer Affairs 34(2): 330–360.
Leon, M. (2012) Money illusions: A study on payment mode and economic framing. Dissertation, California State University, Fullerton, CA.
Levin, LP, Schneider, S.L. and Gaeth, G.J. (2005) All frames are not created equal: A typology and critical analysis of framing effects. Organizational Behavior and Human Decision Processes 76: 149–188.
Lucey T. (2005) Assessing the reliability and validity of the Jump Start survey of financial literacy. Journal of Family and Economic Issues 26(2): 283–294.
Lusardi, A. and Mitchell, O.S. (2007a) Baby boomer retirement security: The roles of planning, financial literacy, and housing wealth. Journal of Monetary Economics 54(1): 205–224.
Lusardi, A. and Mitchell, O.S. (2007b) Financial literacy and retirement preparedness: Evidence and implications for financial education. Business Economics 42(1): 35–44.
Lusardi, A. (2012) Financial literacy and financial decision-making in older adults. Generations 36(2): 25–32.
Mandell, L. (2004) Financial Literacy: Are We Improving? Results of the 2004 National Jump Start Survey. Washington DC: Jump Start Coalition.
Markovich, C.A. and DeVaney S.A. (1997) College seniors’ personal finance knowledge and practices. Journal of Family and Consumer Sciences 89: 61–65.
Meyerowitz, B.E. and Chaiken, S. (1987) The effect of message framing on breast self-examination attitudes, intentions, and behavior. Journal of Personality and Social Psychology 52(3): 500–510.
National Council on Economic Education (2005) What American teens & adults know about economics. http://www.councilforeconed.org/cel/WhatAmericans KnowAboutEconomics_042605–3 .pdf.
Neal, D. and Johnson, W. (1996) The role of pre-market factors in black-white wage differences. Journal of Political Economy 104(5): 869–898.
Organisation lor Economic Co-operation and Development (2005) Improving Financial Literacy: Analysis of Issues and Policies. Paris: OECD.
Park, S. (2004) Consumer rationality and credit card pricing: An explanation based on the option value of credit lines. Managerial and Decision Economics 25(5): 243–254.
Peng, T.C., Bartholomae, S., Fox, J.J. and Cravener, G. (2007) The impact of personal finance education delivered in high school and college courses. Journal of Family and Economic Issues 28(2): 265–284.
Perry, V.G. (2008) Is ignorance bliss? Consumer accuracy in judgments about credit ratings. The Journal of Consumer Affairs 42(2): 189–205.
Ranyard, R., Hinkley L., Williamson, J. and McHugh, S. (2006) The role of mental accounting in consumer credit decision processes. Journal of Economic Psychology 27(4): 571–588.
Robb, C. (2011) Financial knowledge and credit card behavior of college students. Journal of Family and Economic Issues 32(4): 690–698.
Sanley A. G. and Hastie, R. (2000) Judgment and decision making across the adult life span. In: D.C. Park and N. Schwarz (eds.) Cognitive aging. Philadelphia, PA: Psychology Press, pp. 253–273.
Seaward, H.G.W. and Kemp, S. (2000) Optimism bias and student debt. New Zealand Journal of Psychology 29(1): 17–19.
Shefrin, H. and Thaler, R. (1988) The behavioral life-cycle hypothesis. Economic Inquiry 26(4): 609–643.
Shui, H. and Ausubel, L. (2005) Time inconsistency in the credit card market. MD: University of Maryland. 30 January. Working Paper.
Soman, D. and Cheema, A. (2002) The effect of credit on spending decisions: The role of the credit limit and credibility. Marketing Science 21(1): 32–53.
Stango, V. (2002) Pricing with consumer switching costs: Evidence from the credit card market. The Journal of Industrial Economics 50(4): 475–492.
Stango, V. and Zinman, J. (2009a) Exponential growth bias and household finance. The Journal of Finance 64(6): 2807–2849.
Stango, V. and Zinman, J. (2009b) What do consumers really pay on their checking and credit card accounts? Explicit, implicit and avoidable costs. American Economic Review: Papers and Proceedings 99(2): 424–429.
Stewart, N. (2009) The cost of anchoring on credit card minimum repayments. Psychological Science 20(1): 39–41.
Stibel, J.M. (2005) Increasing productivity through framing effects lor interactive consumer choice. Cognition, Technology & Work 7(1): 63–68.
Telyukova, I. and Wright, R. (2008) A model of money and credit, with application to the credit card debt puzzle. Review of Economics Studies 75(2): 629–647.
Telyukova, I. (2013) Household need lor liquidity and the credit card debt puzzle. Review of Economic Studies 80(3): 1148–1177.
Tversky A. and Kahneman, D. (1981) The framing of decisions and the psychology of choice. Science 211(4481): 453–458.
Volpe, R.P., Chen, H. and Pavlicko, J.J. (1996) Personal investment literacy among college students: A survey. Financial Practice and Education 6: 89–94.
White, M. (2007) Bankruptcy reform and credit cards. Journal of Economic Perspectives 21(4): 175–199.
Wonder, N., Wilhelm, W and Fewings, D. (2008) The financial rationality of consumer loan choices: Revealed preferences concerning interest rates, down payments, contract length, and rebates. The Journal of Consumer Affairs 42(2): 243–271.
Worthy, S.L, Jonkman, J. and Blinn-Pike, L. (2010) Sensation-seeking, risk-taking, and problematic financial behaviors of college students. Journal of Family and Economic Issues 31(2): 161–170.
Zinman, J. (2007) Household Borrowing High and Lending Low Under No-Arbitrage. Dartmouth College, 19 April. Working Paper.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2016 The Editor(s)
About this chapter
Cite this chapter
Shen, N. (2016). Consumer Rationality/Irrationality and Financial Literacy in the Credit Card Market: Implications from an Integrative Review. In: Harrison, T. (eds) Financial Literacy and the Limits of Financial Decision-Making. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-30886-9_8
Download citation
DOI: https://doi.org/10.1007/978-3-319-30886-9_8
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-319-30885-2
Online ISBN: 978-3-319-30886-9
eBook Packages: Economics and FinanceEconomics and Finance (R0)