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Wednesday, February 29, 2012

Credit Scores, Payment Choice and Durbin

The policy implication from a recent paper released by the Federal Reserve Bank of Boston is that younger, less educated, and lower income consumers, as a group, may be adversely affected by the Durbin interchange fee cap.

The study looked at the relationship between credit scores and consumer payment choices. It found that even when controlling for several variables that affect payment behavior, consumers with a higher credit score have a higher probability of holding a credit card, and a lower probability of holding a debit card. Moreover, cardholders with higher credit scores were found to use credit cards for a higher share of their payments and use debit cards less.

The study postulates that if financial institutions attempt to recoup forgone interchange revenues due to the Durbin amendment by charging a debit card fee, consumers with low credit scores are more likely to be harmed by a debit card fee. Low credit score consumers -- who tend to be younger, less educated and lower income -- use debit cards more intensively than those with high credit scores because their access to alternative means of payment is restricted.

Read the paper.

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