Minimum Payment Warnings Nudge Credit Card Payments Up and Down
CHICAGO, June 17, 2014 /PRNewswire-USNewswire/ -- Recent research in the Journal of Public Policy & Marketing investigates how minimum payment warnings on credit card statements can increase monthly payments for some cardholders and decrease monthly payments for others.
Public policy makers encourage lenders to disclose loan cost information so borrowers can make more-informed debt repayment decisions. The Credit Card Accountability and Responsibility Disclosure (CARD) Act of 2009 requires that a "minimum payment warning" be included on all monthly credit card statements, warning cardholders that paying the minimum required amount every month will lead to high interest costs and a long time to pay off the card balance. Australia and Canada have introduced similar regulations. But how effective are these regulations at changing payment behavior and helping consumers to better manage their debt?
In her article appearing in the latest issue of the American Marketing Association's Journal of Public Policy & Marketing, Boston College Professor Linda Court Salisbury conducted two studies with 667 U.S. consumers and found that disclosing information about the high cost of repaying the minimum required amount each month had little impact on repayment decisions. However, when the statement also included an information "nudge" highlighting the payment amount that gives the cardholder a 3-year payoff time and lowers interest costs, the proportion of consumers choosing that "3-year payment amount" increased considerably. And further examination revealed that the interest cost information was pushing low payments up toward the 3-year amount, while the payoff time information was pushing larger payments down toward the 3-year payment amount.
This has important implications for regulatory policies and lender practices: simply informing borrowers about the detrimental effects of repaying the minimum required may do little to change behavior; instead, a nudge is more likely to change repayment behavior. "At the same time," notes Salisbury, "policymakers and firms need to consider that calling attention to alternative repayment amounts also comes with an accompanying risk that borrowers' repayments could decrease if the salient alternative repayment is lower than what the consumer would have chosen to repay had no information been disclosed at all."
Information disclosure of this type, whose objective is to reduce consumer debt levels, may achieve its objectives for some consumers, but have the opposite effect for others. The research suggests that information disclosure is likely to be most effective when it is tailored to different credit card customer segments.
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SOURCE American Marketing Association