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The effect of promotional interest rates on customer borrowing and payment behavior in the credit card industry

  • B. P. S. Murthi
  • Marina Girju
  • Erin SteffesEmail author
Original Article
  • 36 Downloads

Abstract

Credit card companies typically offer limited-time teaser interest rates [also known as promotional annual percentage rates (APRs)] to attract new customers. Firms hope that the promotional APRs will encourage consumers not only to open accounts, but also to transfer balances from other credit cards, revolve credit card balances, or take cash advances, each of which would lead to an increase in the firm’s profit. It is important to understand the effect of the promotional rates on customer behavior. Important research questions include: Does the lure of a low APR increase indebtedness of a customer over the short run and the long run? Between two segments—needy and opportunistic customers—which group is more likely to take advantage of the offer? A related important question for firms is whether the low APRs increase the financial risk (i.e., probability of delinquency or the probability of default of a customer) thus imposing costs of monitoring and balance recovery on the firm. Given the limited published research on these topics, we take a closer look at some of the behavioral patterns associated with the offer of promotional APRs in this study.

Keywords

Customer profitability Customer relationship management Teaser rates Promotional rates Customer behavior Segmentation Delinquency risk 

Notes

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Copyright information

© Springer Nature Limited 2019

Authors and Affiliations

  1. 1.The University of Texas at DallasRichardsonUSA
  2. 2.DePaul UniversityChicagoUSA
  3. 3.Towson UniversityTowsonUSA

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