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Perverse Nudges: Minimum Payments and Debt Paydown in Consumer Credit Cards

Author

Listed:
  • Jialan Wang

    (Consumer Financial Protection Bureau)

  • Benjamin Keys

    (University of Chicago)

Abstract

What factors impact how much consumers repay on their credit cards each month? This paper examines the drivers of payment behavior using the CFPB credit card database, which includes the monthly account activity of a large fraction of U.S. consumers from 2008-2012. We find that consumers' payment behavior is consistent and strongly bimodal. Most accounts are either paid in full or paid near the minimum amount each month, with very few intermediate payment amounts. We then evaluate the impact of two types of policy changes: 1) changes in the minimum payment formulas implemented by individual issuers, and 2) new payment disclosures mandated by the CARD Act of 2010. The policy changes led to small increases in the payments made by consumers previously paying the minimum. On average, the CARD Act disclosures increased consumer payments by $19 per month from February 2010 to December 2012. However, both the formula changes and the CARD Act's 3-year payment disclosure had the perverse effect of decreasing the fraction of accounts paid in full by 1%. These findings are difficult to reconcile with rational economic models, and imply that setting suggested payments at low amounts lead some consumers to reduce their overall debt payments. Our results suggest that anchoring and the salience of minimum payments play an important role in the credit card market.

Suggested Citation

  • Jialan Wang & Benjamin Keys, 2014. "Perverse Nudges: Minimum Payments and Debt Paydown in Consumer Credit Cards," 2014 Meeting Papers 323, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:323
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    File URL: https://economicdynamics.org/meetpapers/2014/paper_323.pdf
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    References listed on IDEAS

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    1. Christopher R. Knittel & Victor Stango, 2003. "Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards," American Economic Review, American Economic Association, vol. 93(5), pages 1703-1729, December.
    2. Sumit Agarwal & Souphala Chomsisengphet & Neale Mahoney & Johannes Stroebel, 2015. "Regulating Consumer Financial Products: Evidence from Credit Cards," The Quarterly Journal of Economics, Oxford University Press, vol. 130(1), pages 111-164.
    3. Paul Heidhues & Botond Koszegi, 2010. "Exploiting Naivete about Self-Control in the Credit Market," American Economic Review, American Economic Association, vol. 100(5), pages 2279-2303, December.
    4. Brito, Dagobert L & Hartley, Peter R, 1995. "Consumer Rationality and Credit Cards," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 400-433, April.
    5. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
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    Cited by:

    1. Santucci, Lawrence, 2015. "Financial management tools and consumer confidence: chase blueprint," Consumer Finance Institute discussion papers 15-4, Federal Reserve Bank of Philadelphia.

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