Effects of Credit Scores on Consumer Payment ChoiceEffects of Credit Scores on Consumer Payment Choice

By Fumiko Hayashi and Joanna Stavins

This paper investigates the effects of credit scores on consumer payment behavior, especially on
debit and credit card use. Anecdotally, a negative relationship between debit card use and
credit score has been reported; however, it is not clear whether that relationship is related to
other factors, such as education or income, or whether it is a mere correlation. We use a new
consumer survey dataset to examine whether this negative relationship holds after controlling
for various consumer characteristics, including demographic and financial characteristics,
consumers' perceptions toward payment methods, and card reward status. The results based
on a single-year survey as well as on panel data suggest that there is a significant negative
relationship between debit card use and credit score even after controlling for various
characteristics. We supplement the analysis with evidence from Equifax data. The results
indicate that an increase in consumers' cost of debit cards-in response to regulatory changes,
for example-would have an adverse effect on low-credit-score consumers (typically those with
lower incomes and less education).

We then investigate what credit score implies. If credit score significantly influences consumer
access to credit cards, credit limits, or the cost of credit cards, then the negative relationship
likely results from supply-side constraints. If a lower credit score is associated with differences
in underlying preferences, then the negative relationship is likely due to demand-side effects.
Preliminary evidence strongly suggests that supply-side factors play an important role in the
cost of credit and in access to credit.

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