Do Credit Card Users Systematically Underestimate Their Interest Rates? Evidence from the Survey of Consumer Finances

Journal of Public Policy & Marketing

This study examines credit card penalty pricing using data from the Survey of Consumer Finances. In particular, the author uses a flag in the data set for the first time to analyze bias in reported credit card interest rate. He also uses this flag to estimate how frequently people mistakenly believe they are not at a penalty interest rate. The results imply that, on average, consumers underestimate their credit card interest rate by 30%–33%. Penalty rates seem to compound this bias. There is also some evidence that consumers who are more optimistic using other measures derived from the survey tend to underestimate their rate by a larger amount.