DETERMINANTS OF BORROWING LIMITS ON CREDIT CARDS∗
Shubhasis Dey+ Gene Mumy++
In the credit card market, banks have to decide on the borrowing limits of their potential customers, when
the amounts of borrowing to be incurred on these lines are uncertain. This borrowing uncertainty can make
the market incomplete and create ex post misallocations. Households who are denied credit could well turn
out to have ex post higher repayment probabilities than some credit card holders who borrow large portions
of their borrowing limits. Similar misallocations may exist within the credit card holders as well. Our
setup also explains how new information on borrowing patterns will generate revisions of existing contracts
and counter offers (such as balance transfer offers) from competing banks. Using data from the U.S.
Survey of Consumer Finances, we propose an empirical solution to this misallocation problem. We show
how this dataset can be used by banks to explain the observed borrowing patterns of their customers and
how these borrowing estimates will help banks to better select and retain their customers by enabling them
to device better contracts. We find support for a positive relationship between the proxies of borrower
quality and the approved borrowing limits on credit cards, controlling for the banks’ selection of credit card
holders and the endogeneity of interest rates. We also find evidence for a positively-sloped credit supply
JEL classification: D4, D8, G2
∗ We are grateful to Lucia Dunn, Stephen Cosslett, Pierre St-Amant, Celine Gauthier, Gregory Caldwell,
and Florian Pelgrin for their helpful comments. The opinions expressed herein need not necessarily reflect
the views of the Bank of Canada.
+ Senior Analyst, Bank of Canada, Canada; email: email@example.com, phone: (613) 782-8067.
++ Associate Professor, Department of Economics, The Ohio State University, USA; email: