Econonlist, Federal Reserve Bank of

I t has long been recognized that interest rates charged on credit cardloans are sticky (that is, they remain high even when the cost of funds drops). Although some studies have blamed market power by issuing banks for the persistently high rates,1 the credit card market is relatively unconcentrated, with hundreds of issuers nationwide. The explanation for the sticky rates is more likely, therefore, to lie on the demand side. Since consumers could minimize their cost of credit by borrowing at the lowest possible rate,2 one would expect banks to drop their rates to attract customers in the competitive market. Yet issuh~g banks do not appear to be behaving in this way. Do banks maintain high rates be-cause customers ’ demand for credit card loans does not respond to changes in the rates they charge (that is, because demand for credit cards is inelastic with respect to the interest rates)? Do consumers indeed borrow at high interest rates because they are irrational, as Ausubel (1991) suggested? Several theories purport to explain credit card rate stickiness.