RDP 2018-11: Consumer Credit Card Choice: Costs, Benefits and Behavioural Biases Appendix C: Regression Analysis of Overall Distribution of Net Benefit

The monetary value that consumers receive from their credit card varies substantially with demographic factors, card use patterns and self-reported motivation for having a credit card. To determine which factors are the most important predictors of net monetary benefit, I employ a regression framework. This exercise is largely descriptive; while certain relationships are likely to be causal, others may be endogenous, and my method does not allow me to directly disentangle any causal relationship.

C.1 Overall Net Benefit

I estimate the following model:

Table C1 presents the regression results. Overall, the most important predictors of the value of the net monetary benefit are income, liquid wealth and motivation for holding a credit card. However, the adjusted R-squared is low across all models, suggesting demographics have relatively low explanatory power over the value of the net monetary benefit that respondents receive from their credit card.

C.2 Components of Net Monetary Benefit

The above specification is based on the total dollar value of respondents' net benefit. Because the value of interest payments by some consumers is very high, the results are likely to be dominated by the factors that are most important in determining interest payments. But credit cards have two distinct functions: the credit function and the payment function. To more fully understand the predictors of gains and losses, I estimate my model using each of the four components of net monetary benefit as dependent variables. I also show the credit and payment function subtotals as dependent variables.

The variables that are important for each element of the net monetary benefit are somewhat different from the variables that are significant for its overall value (Table C2). Household income is an important predictor of the value that cardholders receive from their rewards points and interest-free period – likely reflecting higher spending rates among higher-income consumers – and of the value of their annual fees, though income is not a significant determinant of the amount of interest charges. Instead, the value of bank deposits had a large negative impact on interest charges, and a small positive impact on the value of benefits, suggesting, as expected, that liquidity constraints are an important determinant of the amount of interest paid.