It's more than a decade since David M. Frank of Iona College published his paper, To Switch or Not to Switch: An Examination of Consumer Behavior in the Credit Card Industry. But it's easy to suspect that some of his findings still hold good. He suggested that consumers fail to switch cards, even though they know they could save money, because:
- They've grown skeptical about teaser promotions and "gotcha" terms and conditions, and have concluded there won't be much long-term benefit in chasing lower credit card rates.
- They ignore direct marketing invitations from card issuers. There are so many offers for plastic around that these have become invisible as they've merged into the general promotional background.
- Some know so little about how credit cards work and even their own spending habits that they've lost interest in keeping their borrowing costs to a minimum.
Making the wrong choices
That skepticism about the long-term benefits of chasing low rates may be well-founded. In 2005, Haiyan Shui and Lawrence M. Ausubel of the University of Maryland conducted another study,
Time Inconsistency in the Credit Card Market
. This found that many consumers are terrible at choosing good credit card offers.
In the study's survey, all but the most financially literate were likely to pick the poorer of these two deals:
- A 4.9 percent APR introductory rate for six months
- A 7.9 percent APR introductory rate for a year
Did you get it right? All other things being equal, you'd pay less if you opted for the higher introductory rate over a longer period.
Switch credit cards and switch again
The Shui/Ausubel study came up with another interesting conclusion: few who switch to zero-percent balance transfer deals are likely to switch again at the end of the promotional introductory period, even when their balances remain high and the rates they're paying have reverted to ones as high or higher than previously. With masterly understatement, the authors observe: "This is puzzling because there are many other offers available and the benefit of switching is as large as before."