TY - JOUR AU - Agarwal,Sumit AU - Skiba,Paige M. AU - Tobacman,Jeremy TI - Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles? JF - National Bureau of Economic Research Working Paper Series VL - No. 14659 PY - 2009 Y2 - January 2009 UR - http://www.nber.org/papers/w14659 L1 - http://www.nber.org/papers/w14659.pdf N1 - Author contact info: Sumit Agarwal Federal Reserve Bank of Chicago 230 South LaSalle Street Chicago, IL 60604 Tel: 312/322-5973 E-Mail: ushakri@yahoo.com Paige M. Skiba Vanderbilt University Law School 131 21st Avenue South Nashville, TN 37203-1181 E-Mail: paige.skiba@vanderbilt.edu Jeremy Tobacman Business and Public Policy Department 1459 Steinberg Hall-Dietrich Hall 3620 Locust Walk The Wharton School University of Pennsylvania Philadelphia, PA 19104-6372 Tel: 215/898-9450 Fax: 215/898-7635 E-Mail: tobacman@wharton.upenn.edu AB - Using a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. First, more specifically, we assess consumers' effectiveness at prioritizing use of their lowest-cost credit option. We find that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans. This is costly because payday loans have annualized interest rates of at least several hundred percent, though perhaps partly explained by the fact that borrowers have experienced substantial declines in credit card liquidity in the year leading up to the payday loan. Second, we show that FICO scores and Teletrack scores have independent information and are specialized for the types of lending where they are used. Teletrack scores have eight times the predictive power for payday loan default as FICO scores. We also show that prime lenders should value information about their borrowers' subprime activity. Taking out a payday loan predicts nearly a doubling in the probability of serious credit card delinquency over the next year. ER -