Borrowing on the Wrong Credit Card: Evidence from Mexico
By Alejandro Ponce (World Justice Project), Enrique Seira (Banco de México; ITAM) & Guillermo Zamarripa (FUNDEF, Mexico)
We study how consumers allocate debt across credit cards they already hold using new data on credit card activity for a representative sample of consumers with two homogeneous cards in Mexico. We find that relative prices are a very weak predictor of the allocation of debt, purchases, and payments. On average, consumers pay 31 % above their minimum financing cost. Evidence on cross-card debt elasticities with respect to interest rates and credit limits show no substitution in the price margin. Our findings offer evidence against the cost-minimizing hypothesis and provide support to behavioral explanations.