![]() Consumers appear to be subject to optimism bias, underestimating how much they will borrow on their card, and a subset of consumers tend to hold inflated estimates of the net monetary benefits that they receive from their card. Behavioural explanations are consistent with some, but not all, of the patterns observed. Moreover, most cardholders, including those who receive a net benefit, appear not to choose cards that best suit their use patterns – for instance, I estimate that consumers who use their card to borrow and pay interest could reduce their annual costs by around $250 by choosing a more appropriate card. Of the remaining 60 per cent, around half break even, while half incur a net cost. Generally these are higher-wealth and higher-income consumers. I find that approximately 40 per cent of Australian credit card holders receive a positive net monetary benefit from their card (that is, they receive benefits from rewards points and their interest-free period that outweigh annual fees and interest payments). I then use these estimates to examine whether principles from behavioural economics – such as optimism bias, bounded rationality and present bias – can help to explain consumers' choice of credit card. To test this possibility, I first estimate the net monetary cost or benefit that individuals in a nationally representative survey obtain from their credit card. But in reality, consumers' decisions may be systematically biased, leading them to select higher-cost credit cards when lower-cost alternatives are available. Theory might suggest that a rational consumer will choose a card that maximises their net monetary benefit. I summarise these costs and benefits as the net monetary benefit associated with a card. While many factors may influence this choice, this paper focuses on the main financial costs and benefits of holding a credit card. The credit card market offers consumers a wide range of options when choosing a card.
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