Weighing Anchor on Credit Card Debt

TL;DR

This paper investigates how minimum payment information influences consumer credit card payment behavior and demonstrates that an intervention can effectively encourage higher payments, especially among less financially-distressed consumers.

Contribution

It introduces a novel intervention to de-anchor payment choices from minimums and links experimental results to real-world payment behaviors and financial distress levels.

Findings

Intervention reduces minimum payment anchoring

Increases average payments and shifts payment distribution

Hypothetical responses closely match actual payment behaviors

Abstract

We find it is common for consumers who are not in financial distress to make credit card payments at or close to the minimum. This pattern is difficult to reconcile with economic factors but can be explained by minimum payment information presented to consumers acting as an anchor that weighs payments down. Building on Stewart (2009), we conduct a hypothetical credit card payment experiment to test an intervention to de-anchor payment choices. This intervention effectively stops consumers selecting payments at the contractual minimum. It also increases their average payments, as well as shifting the distribution of payments. By de-anchoring choices from the minimum, consumers increasingly choose the full payment amount - which potentially seems to act as a target payment for consumers. We innovate by linking the experimental responses to survey responses on financial distress and to actual credit card payment behaviours. We find that the intervention largely increases payments made by less financially-distressed consumers. We are also able to evaluate the potential external validity of our experiment and find that hypothetical responses are closely related to consumers' actual credit card payments.