Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles? By SUMIT AGARWAL, PAIGE

Among the many important questions highlighted by recent events in the nancial sector, one concerns the features and determinants of the liability side of households' balance sheets, and a second concerns the measurement of household creditworthiness. Had households taken on and accumulated debt with more wisdom and caution, and had lenders obtained and relied on more meaningful measures of creditworthiness, foreclosure rates might now be more moderate. Using a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. (In abbreviated fashion, we aspire to follow the similar inquiries of Adams, Einav and Levin forthcoming in the auto market context.) First, more speci cally, we assess consumers' effectiveness at prioritizing use of their lowest-cost credit option, while Agarwal, Chomsisengphet, Liu and Souleles 2007b examine the choice between two different credit card contracts with different costs, here we nd that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans.1