Minimum Payments and Debt Paydown in Consumer Credit Cards

Benjamin Keys and Jialan Wang

No 22742, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D14 G02 G21 G28 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-ban, nep-mkt and nep-pay
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Published as Benjamin J. Keys & Jialan Wang, 2018. "Minimum payments and debt paydown in consumer credit cards," Journal of Financial Economics, .

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Journal Article: Minimum payments and debt paydown in consumer credit cards (2019)
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