Credit card and payday loan borrowing : evidence in the SCF 2010–2019

Abstract

Unsecured borrowing plays an important role for consumers in smoothing consumption. Each year, almost 40% of U.S. house holds have credit card debts and 4% borrow using a high-cost payday loan. This paper aims to explore the similarities and differences between both types of borrowers. Using the Survey of Consumer Finances(SCF)from 2010 to 2019, I document that: (1) credit card borrowers are middle-aged, upper-middle-class, with some college exposure, and financially literate; (2) payday loan borrowers are young, low-incomeand low-wealth, less educated,and less financially literate; and (3) payday loan borrowers lack the financial knowledge of inflation and risk diversification, but not of compound interest.