What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs

Consumers in the United States make billions of transactions each year using cash, checks, debit cards, and credit cards. Bank and credit card accounts provide consumers with liquidity to clear and settle these transactions. In return, consumers pay a variety of fees, and both explicit and implicit interest charges. The importance of retail banking and credit markets to economic activity drives interest in many open policy and research questions. Do households borrow too much relative to a neoclassical benchmark (Christopher D. Carroll 2001)? Why do many households leave a substantial amount of money on the table in managing their accounts (Sumit Agarwal et al. 2006; David Gross and Nicholas Souleles 2002)? Do firms structure pricing to exploit consumer cognitive biases or limitations (Stefano DellaVigna and Ulrike Malmendier 2004; Xavier Gabaix and David Laibson 2006)? How do learning (Sumit Agarwal, John Driscoll, and Gabaix 2008) and disclosure regulation (Stango and Zinman 2009b) interact with consumer decision making and firm strategy to determine market outcomes? This paper examines some threshold questions that should inform the questions above: what do people really pay to use their bank and credit card accounts, and which cost components are the largest? Of all the costs that people pay, which could they easily avoid by making different day-to-day choices? And how stable are both the level of costs and the share of costs that are “avoidable,” for a given person over time? What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs