Document Type

Working Paper

Publication Date

2006

Center/Program

Center for Contract and Economic Organization

Center/Program

Center for Law and Economic Studies

Abstract

This paper relies on data from countries around the world to present a comprehensive analysis of policy issues related to credit cards. The first part discusses the rise of credit cards and debit cards and how their uses differ from country to country. It closes with a framework for explaining why cards are more and less successful in different countries, focusing in large part on the ready availability of detailed consumer credit information. The second part considers the relation between credit card use and bankruptcy. Relying on a time series of data from the United States, Canada, Great Britain and Australia, the analysis shows that credit-card debt correlates positively with consumer bankruptcy, even when consumer credit is held constant. Thus, if a country's total consumer debt burden remains constant, but a portion of the debt shifts to credit cards, the data suggests that consumer bankruptcies will rise in the future. {The relationship is strongest with a one-year time lag.} The third part considers various policies related to credit card use. It criticizes the interchange restrictions being considered in Australia, the EU, and the UK, and recommends several changes to American law. The most important would be restrictions on marketing to minors and college students, restrictions on affinity programs that are tied to a consumer's decision not to repay their charges monthly, and requirements of enhanced disclosures at the point of sale.

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