Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?

Sumit Agarwal, Paige M. Skiba, Jeremy Tobacman

NBER Working Paper No. 14659
Issued in January 2009
NBER Program(s):Industrial Organization, Monetary Economics

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.

download in pdf format
   (162 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14659

Published: Agarwal, Sumit, Paige Marta Skiba, and Jeremy Tobacman. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?" American Economic Review 99, 2 (2009): 412-417. citation courtesy of

Users who downloaded this paper also downloaded* these:
Adams, Einav, and Levin w13067 Liquidity Constraints and Imperfect Information in Subprime Lending
Gross and Souleles w8314 Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data
Agarwal, Driscoll, Gabaix, and Laibson w13822 Learning in the Credit Card Market
Lusardi and Tufano w14808 Debt Literacy, Financial Experiences, and Overindebtedness
Gan and Mosquera w13873 An Empirical Study of the Credit Market with Unobserved Consumer Typers
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us