Sunday, February 04, 2024

Nudging away from minimum payments in credit cards

Disclaimer: I sometimes discuss live policy issues on this blog. All opinions expressed are my own and do not represent the views of LSE or any other entity.

A recent NBER paper by Benedict Gutmann-Kenney, Paul Adams, Stefan Hunt, David Laibson, Neil Stewart, and Jesse Leary examines what happens when you remove the minimum payment anchor from credit cards. Abstract below. 

We run a field experiment and a survey experiment to study an active choice nudge. Our nudge is designed to reduce the anchoring of credit card payments to the minimum payment. In our field experiment, the nudge reduces enrollment in Autopaying the minimum from 36.9% to 9.6%. However, the nudge does not reduce credit card debt after seven payment cycles. Nudged cardholders tend to choose Autopay amounts that are only slightly higher than the minimum payment. The nudge lowers Autopay enrollment resulting in increasing missed payments. Finally, the nudge reduces manual payments by cardholders enrolled in Autopay.

Firstly, NBER working papers are put out for discussion and could potentially change between when they are published and after peer review. Secondly, it is worth a meta-point about the direction behavioural science is taking in these areas. The paper combines survey experiments with field experiments conducted in collaboration with two major financial providers. The experiments are pre-registered and longitudinal and with very large samples. While such set-ups can end up self-selecting as they require senior industry figures to facilitate, it is also clear that regulators have some power to shape this. 

In this case, a well-known mechanism (anchoring) is tested first in a survey setting replication prior work in this area. The replication exercise is broadly in the direction we would expect, with respondents being more likely to use the minimum payment option when it is made salient. Therefore taking it away potentially improves consumer outcomes by encouraging consumers to pay off the debt more quickly.  However, over a relatively short time horizon in both field experiments they conduct the advantages to the consumers erodes to zero through a combination of more missed payments and less voluntary additional payments. Basically the advantage accrued from utilising knowledge about anchoring to change behaviour in this area does not persist.  

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