Research on the behavior of credit card balance switching is underdeveloped because data on the phenomenon are quite limited. The few previous studies suggest that consumers' choice of accepting a low introductory interest rate and then switching a balance to it mainly depends on the APR difference and the outstanding credit card balances. This dissertation uses the Consumer Finance Monthly data with much richer information about consumers' credit history and card holding conditions to investigate several fundamental factors in balance switching. A theoretical model is developed to rationalize revolvers' decision about balance switching. An exercise of dynamic optimization is conducted to reveal the relationship between switchers' reservation rate, payment process, and the predicted duration spell. Econometric methods are used to do the empirical analysis. Two endogenous switching regression models are applied to inspect two distinct responses on the switchers' side. The accelerated lifetime model is adopted to capture the impact of the credit card debt and other relevant factors on the duration spell for holding an initial card. Last, we address the issue of unobserved heterogeneity in a structural Weibull-Gamma duration model.
The two theoretical predictions in this paper are consistent with the primary findings in our empirical study. Switchers wait for an interest rate that is regarded as sufficiently low. Consumers with worse payment history have to wait longer to receive such a low rate. Our survival analysis shows that the degree of stress over the debt rather than the amount of credit card debt itself hastens consumers' switching decision. The fitted hazard rate is bell-shaped both in the accelerated lifetime model with Gamma distribution and in the structural duration model.
Cardholders are most likely to switch in the window of the sixth to twelfth month staying with old cards.
Our empirical findings support "adverse selection" as in Ausubel (1991). Switchers improved their debt situation right after switching. But balance switching could only bring symptomatic relief but not a credit cure. Switchers still bear a heavier burden of credit card debt in the long run.