Nov 11 2008

Debit vs. Credit: How People Chose to Pay


A new, emerging branch of economics called behavioral economics attempts to take the messy concepts of psychology and behavior into consideration to develop new models of how people make economic decisions. In Debit vs. Credit: How People Choose to Pay, we examine a decision that is especially germane to credit unions.

Authors Victor Stango,PhD, University of California, Davis; and Jonathan Zinman, PhD, Dartmouth College, use a new dataset that tracks transaction-level choices consumers make between debit and credit, as well as detailed information on consumer characteristics such as income and creditworthiness. Study findings include:

  • Most people “single-home,” using nearly all debit or credit for retail purchases.
  • Purchase characteristics, such as transaction size, influence payment choices, but there is a clear “propensity to use debit” that varies across consumers and is stable over time. It is also fairly easy to classify people as “debit users” or “credit users.”
  • Debit and credit users have both similarities and differences. While there are only small differences in income and total spending, debit users tend to be less creditworthy than credit users, and their credit cards have higher interest rates.
Report Number 172