Borrowing High vs. Borrowing Higher: Sources and Consequences of Dispersion in Individual Borrowing Costs

We document cross-individual variation in U.S. credit card borrowing costs (APRs) that is large enough to explain substantial differences in household saving rates. Borrower default risk and card characteristics explain roughly 40% of APRs. The remaining dispersion exists because a borrower can receive offers and hold cards with wide-ranging APRs, as different issuers price the same observable risk metrics quite differently. Borrower debt (mis)allocation across cards explains little dispersion. But self-reported borrower search/shopping (along with instruments for shopping implied by Fair Lending law) can explain APR differences comparable to moving someone from the worst credit score decile to the best.