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A STUDY ON LITERACY AND USAGE BEHAVIOUR OF CREDIT CARDS USERS IN

INDIA

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DOI: 10.18510/hssr.2020.819

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 A STUDY ON LITERACY AND USAGE BEHAVIOUR OF CREDIT CARDS
USERS IN INDIA
Mohammad Ahmar Uddin
Assistant Professor, Department and Finance and Economics, Dhofar University, Salalah Oman.
Email: ahmar@du.edu.om
Article History: Received on 19th November 2019, Revised on 19th December 2019, Published on 15th January 2020
Abstract
Purpose of the study: This study aims to find credit card literacy (henceforward CCL) and credit card usage behavior
(henceforward CCUB) in India.
Methodology: A survey was conducted on 400 respondents who were using a credit card in India. The questionnaire
used for collecting data consisted of three sections; demographic information, CCL, and CCUB. To check the CCL, the
customers were asked to rate their awareness of the terms and conditions of the credit card providers, while CCUB was
measured using five questions.
Main findings: CCL is found to be 34% and the results of logistic regression show that CCL and demographic factors
influence the CCUB.
Implications of this study: An understanding of the CCUB will be helpful in controlling excessive debt and high-
interest payments.
Novelty/Originality of this study: This paper gives a unique insight into CCL and CCUB in India
Keywords: Behavior, Credit Card, Demographics, India, Literacy, Logistic Regression.
JEL Code: G20, I25, D10, J10, C00
INTRODUCTION
Credit card usage started in the USA in the 1940s, and their usage became common due to their convenience and use in
online transactions. Initially, cash and then cheques were mainly used for monetary transactions. As of now, the credit
card is also a popular means for payment The wide acceptability of cards the world over can be gauged by the large
numbers of credit cards worldwide. A credit card offers a number of advantages as compared to cash for users such as;
safety, convenience, short-term free credit, rewards points, etc. Merchants also benefit from credit cards as people
incline to spend more while using credit cards.
Credit card usage offers a number of benefits and drawbacks subject to user behavior. Sensible and correct use of credit
cards increases the liquidity and offers supplementary funds. Conversely, credit card transactions done in excess of the
financial limits of the user results in unnecessary debt. The increased spending due to credit cards results in excessive
credit card debts. Debt due to a credit card has risen more rapidly than the disposable income; this has alarmed
policymakers and governments. Though the increase in consumption is encouraging for the economy high levels of debt
may create financial difficulties or lead to bankruptcy, hence in the long-term, it will result in slower economic growth.
Apart from misuse by consumers, sometimes the credit card companies exploit the customers through high-interest rates
and hidden fees (Tidwell, Bexley & Maniam 2010).
CCL is the awareness of the terms and conditions of a credit card. Due to the lack of research on CCL, many researchers
have so far used financial literacy as a proxy for CCL. As per OECD-INFE (2012), “Financial literacy consists of
awareness, knowledge, skill, attitude, and behavior required for taking wide-ranging financial decisions resulting in an
individual’s financial wellbeing”. Lesser financial knowledge results in more debt and risky behavior (Norvilitis,
Merwin, Osberg, Roehling, Young & Kamas, 2006; Robb, 2011). In general, though there is proof that financial literacy
positively encourages individuals to exhibit a more conscious financial behavior there are contradictions in the previous
research. The results of the previous study vary based on the topic or population of the study (Robb 2011).
Figure 1 shows the status of credit cards in India. The number of credit cards has increased 2 times from 24.4 million in
2015-16 to 48.9 million in 2018-19. The transaction amount has increased almost 3 times from Rs.2.4 Trillion in 2015-
16 to Rs. 6.07 Trillion. in 2018-19. The number of transactions has also increased 2 times from 0.8 billion in 2015-16 to
1.7 billion in 2018-19.
This study aims to find the CCL and examine the CCUB in India. Given the inconsistencies in the previous studies and
the lack of similar studies in India, there is a need to research CCL and CCUB in India. This study will be helpful to
individuals, researchers, regulating bodies, businesses, and banks.
LITERATURE REVIEW
Usage of credit cards is increasing, and individuals and businesses all over the world are moving from cash to cards in
their day-to-day transactions. Reasons for using credit cards are easy to fulfill eligibility conditions (Canner & Luckett
1992), providing an opportunity of investing the available cash (Chang & Hanna 1992), easy to borrow money and
higher spending by the holder (Cargill & Wendell, 1996), convenience and safety (Mayer 1997), esteem and
acceptability (Medina & Chau 1998), cardholders do not need to carry cash (Lee & Kwon, 2002) and consumers spend
more with credit cards as they facilitate spending (McCall & Belmont 2002). Humphrey (2004) through an econometric
model, showed that during a twenty-five-year period the use of cash has fallen as people are going in for cashless
transactions. For Indians, the major determinants are the use and convenience of the credit card (Khare, Khare, & Singh,
2012).

Figure 1: Status of Credit Card in India

Source: https://economictimes.indiatimes.com/industry/banking/finance/banking/credit-card-usage-rides-on-digital-
push-grows-27/articleshow/70580357.cms?from=mdr
Demographics and Card Usage Behavior
Researchers have studied how the various demographic factors (gender, age, ethnic background, education, income)
affect the use of a credit card. Credit card companies also consider the demographic factors while issuing the cards, for
example, preference is given to individuals with high income and education.
Reasie, Janice & Weber (2001) found that women were more likely to limit their spending. Researchers, such as Mandell
(2004) found that family income and education were the major indicators. Keeping in control the cost, convenience, and
security, the payment behavior depends on the consumers’ socio-demographic attributes such as age, education, and race
and income. Low income and low education and minorities are more likely to use cash. Safakli (2007) in Northern
Cyprus using factor analysis found that for credit card selection, education and family income are important. The
financial decisions of older adults are more likely to be suboptimal (Agarwal, Driscoll, Gabaix & Laibson 2009; Choi,
Laibson & Madrian, 2011).
Khare, Khare, & Singh (2012) using multiple linear Regression showed that in India young customers were likely to use
credit cards. Themba & Tumedi (2012) used chi-square and cross-tabulation and found that education, gender and
marital status influence card usage in Botswana. Men have higher financial literacy than women (Fonseca et al. 2012).
The lower financial literacy of women impacts their general financial well-being such as the behavior of late payment
and overuse of credit cards. (Allgood & Walstad, 2011; Mottola, 2012).
In Canada, the relationship between wealth/income and credit card repayment shows that due to their low financial
literacy, persons with low-income make credit card payment mistakes (Scholnick, Massoudan & Saunders, 2013). Also,
men and single persons use more cash (Connolly & Stavins, 2015; Stavins, 2016). Nai (2018) analyzed the data of
Survey of Consumer Payment Choice and found that the use of credit card declines after the age of 26 to the age of 58
and thereafter it starts to rise again. Youths are likely to borrow more but at the same time pay less interest than older
credit card customers.
Credit card payment behavior
A considerable number of credit card holders (about 40%) given a choice will select a more expensive credit card
(Agarwal, Chomsisengphet, Liu & Souleles, 2015). Researchers have also highlighted the phenomenon of credit card
debt puzzle whereby low-interest monetary assets and low-interest credit cards are available but they are not used to pay
the high-interest credit card debt (Gathergood, Mahoney, Stewart & Weber, 2018); Gorbachev & Luengo-Prado, 2017;
Ponce, Seira & Zamarripa, 2017 and Zinman; 2015).

Instead of rational optimization, heuristics are used which leads to bias in credit card behavior. Mental accounting and
limited attention are also prevalent. (Attention is stretched thusa people have a difficult time focusing on both the
benefits and consequences of their choice related to card repayment (Ponce et al. 2017). Barboza (2018) and Kuchler &
Pagel (2017) empirically showed that card holder’s exhibit present-bias resulting in overuse of their cards and delay in
the repayments. Heuristics like balance matching are also used for card repayment. Bannier, Gartner & Semmler (2018)
and Gathergood et al. 2018 found that allocation error (cuckoo fallacy) is exhibited in the repayment of credit card debt
whereby repayment of the card that produces more new debts are usually done.
Financial Knowledge and Cards Usage Behavior
Hilgert, Hogarth & Beverly (2003) examined the behavior of households and concluded that credit management depends
on financial knowledge. While Jones (2005) concluded that knowledge didn’t influence behavior. Thus the relationship
between financial knowledge and card usage behavior has been varied and conflicting. The results of the studies vary
depending on the behaviors studied, methods of measuring financial knowledge and the populations used in the study
(Peng, Bartholomae, Fox & Cravener, 2007).
Future financial problems can be avoided through financial knowledge (Avard, Manton, English & Walker 2005;
Braunsberger, Lucas & Roach, 2004, Shim, Barber, Card, Xiao & Serido, 2010). Contrarily, Robb & Sharpe (2009) used
six-questions to measure financial knowledge and found that knowledgeable individuals have higher balances.
Woodyard, Robb, Babiarz & Jung Woodyard (2017) used logistic regressions to analyze four types of financial behavior
and found that financial behavior is influenced by the level of knowledge. Credit card literacy positively influences
financial wellbeing especially when college students own fewer credit cards (Limbu & Sato, 2019).
MATERIALS AND METHODS
Sample Frame and Sampling Procedures
Data were collected using a convenient sample of credit card users from various socio-economic backgrounds in India.
The total numbers of respondents were 400.
Development of the Questionnaire
The questionnaire used for collecting data consisted of three sections; demographic information, CCL, and CCUB. A
literature review formed the basis for developing the questionnaires. The content validity of questionnaires was checked
by academic and industry experts and then a pilot study was conducted to test the reliability. Based on their advice the
items in the scale were later modified. Data were collected from June 2018 to January 2019.
In this study, CCL was measured by the response to questions shown in table 1. Customers were asked to rate their
awareness of the terms and conditions of credit card providers. On a scale of 1-5, the average score 1-2 were classified as
low, 3 as medium and 4-5 as high credit card knowledge. For measuring CCUB table 2 was used. Risky responses serve
as the reference group.
Table 1: Awareness of terms and conditions
 Source: RBI/2015-16/31 DBR.No.FSD.BC.18/24.01.009/2015-16
https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9838

Table 2: Credit card usage behavior

Questions Almost Always Never
Maximum Credit Limit
Timely payment of dues
Only minimum payment
Delinquency in payment
Maximum Cash Withdrawl
 Source: Adopted from Robb (2011)
Research Variables and Their Measurement
Variables included demographics, CCL and CCUB (Table 3). Demographic variables included education, age, gender,
and Occupation.
Table 3 : Measurement of variables used in regression

CCUB 1=Risky Behavior 1; 2=Non-risky Behavior (RG);

CCL 1=Low (RG);2=Medium;3=High
Education 1=Up to High School (RG); 2=Intermediate; 3=Graduate
Age 1=18-30 (RG);2=31-40; 3=41-50; 4=Above 50
Gender 1 = Female (RG); 2 = Male
Occupation 1 = Service (RG); 2 = Business

RESEARCH METHODS
Risky credit card behavior is predicted using variables. As the prediction is dichotomous logistic regression is suitable.
The equation for logistic regression is given as;
𝑃(𝑌) =1/{1+𝑒−(𝑏0+𝑏1𝑋1𝑖+𝑏2𝑋2𝑖+⋯+𝑏𝑛𝑋𝑛𝑖)}
Where P(Y) is the probability of Risky Behavior; Xi predictor variable; bi coefficient of predictor variable; e is the base
of natural logarithms and b0 is a constant.
Results and discussion
The CCL was found to be 34 percent. The results of the logistic regression are shown in table 4.
Maximum Credit Limit
The independent variables can predict between 24.4% and 33.6% of the spending and the overall correct prediction is
73%. Literates, males and educated persons are less likely to spend up to the maximum credit limit. Age and occupation
are not significant.
Timely Payment
The independent variables can predict between 16.8% and 23.2% of the spending and the overall correct prediction is
69%. Higher CCL persons, higher age groups, educated and salaried persons are more likely to pay on time. Gender is
not significant.
Only Minimum Payment
The independent variables can predict between 11.6% and 16% of the spending the overall correct prediction is 74%.
Higher CCL persons, higher educated and business persons are less likely to make only minimum payments. Females are
more likely to make only minimum payments. Age is not significant.
Delinquent in payment
The independent variables can predict between 15.4% and 21.1 of the spending and the overall correct prediction is
68.7%. Higher CCL persons and males have a lesser likelihood of delinquency in payment. Age, education, and
occupation are not significant
Advances on Credit Card
The independent variables can predict between 15.9% and 21.6 of the spending and the overall correct prediction is 67%.
Higher CCL and persons in the age group of 41-50 and above 50 are less likely to take an advance on credit cards. While
males and persons engaged in business are more likely to make advances on credit cards. Education is not significant.
CONCLUSIONS AND SUGGESTIONS
The CCL was found to be low (34 percent) as compared to previous studies such as 53 percent Chen & Volpe (1998), 52
percent Mandell (2004), 56 percent Jones (2005), and 37 percent by Lusardi, Mitchell & Curto (2010). Individuals with
higher CCL have been found to engage in less risky behaviors such as spending up to a maximum credit limit, making
the due payment on time, the lesser likelihood of delinquency in payment and taking lesser cash advances. Previous
studies such as Norvilitis et al. (2006) and Robb (2011) also found that lower financial knowledge results in more credit
card debt and riskier use of credit cards.
Gender wise differences are found related to the credit limit, minimum payment amount, delinquency in payment and
advance on credit cards. On some parameters, males show a riskier behavior while other females have been found to
engage in riskier behavior. Age is significant as respondents from higher age groups are more likely to pay on time.
Also, the age groups of 41-50 and above 50 are less likely to take an advance on credit cards. Lastly, salaried persons are
more likely to pay on time, to make only minimum payments and less likely to take a cash advance. Previous studies
such as Chien & DeVaney (2001) and Gartner & Todd (2005) also found that CCL and education were important
factors. Previous studies such as (Themba & Tumedi, 2012) have also highlighted the demographic differences in
CCUB.
Thus, it is important to increase the knowledge of the terms and conditions associated with credit cards in India, as this
will encourage a more conscious usage. We can increase the CCL through a financial education program on credit
cards. Also, the outreach strategy should be as per the stages of the life cycle of a card user. Apart from traditional
methods digital methods such as short films, cartoons and quizzes should be promoted. There is also a need to account
for the demographic differences in credit card behavior while conducting the training program. Training programs for
the credit card holder should be conducted by the Reserve Bank of India and NGOs for consumer protection, in
collaboration with credit card providers.
LIMITATIONS
The present study supports that higher CCL is associated with more beneficial credit card usage. Due to the lack of a
standardized tool to measure CCL, the findings of this study may be restricted. There is a need to develop a consistent
and common measure of credit card knowledge for future studies. Another limitation is that some demographic factors
such as family size, ethnicity and location have not been included in this study. Future research should also focus on
factors that can improve CCL as it is associated with better credit card usage behavior.
ACKNOWLEDGMENT
The author confirms that there is no conflict of interest.
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 Table 4 Results of Logistic Regression

Maximum Credit Limit Timely Payment Only Minimum Delinquent in payment Advances on Credit
B S.E Exp(B) B S.E Exp(B) Payment S.E
B Exp(B) B S.E Exp(B) Card
B S.E Exp(B)
CCL- L
CCL- M - .367 .177* 1.016 .33 .362* -.568 .318 .566* - .325 .319* - .319 .355*
CCL- H 1.734
-.635 .371 .530* .334 3.36 .716* -.449 .358 .638* 1.142
-.374 .355 .688* 1.035
-.507 .356 .602*
Gender-F -.994 .359 .370** -.816 1.33 .442 -.809 .316 .445* -.965 .324 .381* .905 .316 .405**
Age 1
Age(31-40) .328 .543 1.388 .627 .53 1.872* .285 .512 1.329 -.102 .499 .903 .141 .495 1.151
Age(41-50) 1.100 .681 3.003 1.288 3.65 3.625* .951 .619 2.587 -.007 .606 .993 -.997 .600 2.709*
Age(Above 50) 1.896 .789 6.662 1.717 4.73 5.571* 1.364 .701 3.912 .614 .690 1.849 - .698 7.251*
Education 9 1.981
Education(Intermediate) -.535 .524 .586** .065 .49 .937* -.088 .481 .915** -.136 .488 .873 -.261 .499 .771
Education(Graduate) - .574 .163** 1.418 1.53 .242* - .518 .306** -.638 .504 .528 -.755 .522 .470
Occupation-Salaried 1.812
- .692 .147 -1.486 7.62 .226* 1.185
- .591 .296* -.575 .573 .563 1.727 .593 .178*
Constant 1.920
1.250 .666 3.490 .252 7.62 1.287 1.219
.211 .605 1.235 .627 .603 1.872 .602 .617 1.826
-2LL 304.585 333.224 8 350.244 344.002 347.595
Cox , Snell R2 0.244 0.168 0.116 0.154 0.159
2
Nagelkerke R 0.336 0.232 0.160 0.211 0.216
Classification Accuracy 73 69 74 68.7 67
*Statistically Significant (P<0.05)
**Statistically Highly Significant (P<0.001)

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