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Minimum payments and debt paydown in consumer credit cards

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  • Keys, Benjamin J.
  • Wang, Jialan

Abstract

Using a data set covering one quarter of the U.S. general-purpose credit card market, we document that 29% of accounts regularly make payments at or near the minimum payment. To explain the prevalence of low payment amounts, we exploit changes in issuers’ minimum payment formulas to quantify the explanatory power of two potential theories: liquidity constraints and anchoring. At least 22% of near-minimum payers (and 9% of all accounts) respond to the formula changes in a manner consistent with anchoring as opposed to liquidity constraints alone. Our results show that anchoring to a salient contractual term has a significant impact on household repayment decisions.

Suggested Citation

  • Keys, Benjamin J. & Wang, Jialan, 2019. "Minimum payments and debt paydown in consumer credit cards," Journal of Financial Economics, Elsevier, vol. 131(3), pages 528-548.
  • Handle: RePEc:eee:jfinec:v:131:y:2019:i:3:p:528-548
    DOI: 10.1016/j.jfineco.2018.09.009
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    References listed on IDEAS

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    More about this item

    Keywords

    Anchoring; Liquidity constraints; Credit cards; Consumer finance; Minimum payments;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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