Minimum Payments and Debt Paydown in Consumer Credit Cards / Benjamin J. Keys, Jialan Wang.

Format:

Book

Author/Creator:

Keys, Benjamin J.

Contributor:

National Bureau of Economic Research.

Wang, Jialan.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22742.

NBER working paper series no. w22742

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

Using a dataset 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. We exploit changes in issuers' minimum payment formulas to distinguish between liquidity constraints and anchoring as explanations for the prevalence of near-minimum payments. Nine to twenty percent of all accounts respond more to the formula changes than expected based on liquidity constraints alone, representing a lower bound on the role of anchoring. Disclosures implemented by the CARD Act, an example of one potential policy solution to anchoring, resulted in fewer than 1% of accounts adopting an alternative suggested payment. Based on back-of-envelope calculations, the disclosures led to $62 million in interest savings per year, but would have saved over $2 billion per year if all anchoring consumers had adopted the new suggested payment. Our results show that anchoring to a salient contractual term has a significant impact on household debt.

Notes:

Print version record

October 2016.