Document Type



One of the strongest arguments against regulating credit cards is the substitution hypothesis, which states that if a restriction on credit cards decreases access, borrowers will respond by using other, less desirable forms of credit. For low-income consumers, the argument is more powerful still, because their other options are high-cost lenders such as pawn shops and rent-to-own stores. But the substitution hypothesis has been more frequently assumed than investigated, and the empirical research that has taken place does not support the theory as strongly as has been supposed. This Article presents original data from a study of low-income women. The findings suggest that lenders such as pawn shops and rent-to-own stores may function as complements more than substitutes. More critically, low-income borrowers may experience credit cards as no more desirable than these other borrowing types. In addition, the research uncovered another form of credit that low-income families routinely use and participants evaluated favorably, but that is never discussed in literature. Both results indicate a need to develop a more nuanced formulation of the hypothesis that better predicts the consequences of credit card regulation.

Date of Authorship for this Version

December 2007