Commitment and Borrower Heterogeneity: Evidence from Revolving Consumer Credit

Based on a unique dataset, we analyze borrower heterogeneity in the debt response to interest rate decreases and credit limit increases in revolving consumer credit. Our key findings show that 1) the debt response of borrowers who commit to monthly minimum repayments is about four times as large as the response of uncommitted borrowers when interest rates decrease and 2) committed borrowers' reaction to credit limit increases is almost 30% stronger. These patterns are most likely to be caused by sophisticated impatient individuals choosing to commit. Lenders can use these insights to implement target-oriented interventions and provide debt more efficiently.