Explaining Contract Heterogeneity in the Credit Card Market

Administrative data are used to establish patterns in contract terms, usage, and default rates of anonymized individual credit card accounts. The canonical heterogeneous-agent macro model is extended with a competitive credit card industry and ex-ante heterogeneity to explain these facts, including that the spread on card interest rates is several multiples of default rates. Some model implications of general interest are: (i) a 10 percent cap on credit card interest rates, as proposed in recent legislation, reduces credit limits for risky borrowers and is welfare reducing for them, and (ii) although most people are not liquidity constrained, the average model marginal propensity to consume (MPC) is in the empirically relevant range because consistency with credit card facts implies people are impatient.