Minimum payments and debt paydown in consumer credit cards

Benjamin Keys and Jialan Wang

Journal of Financial Economics, 2019, vol. 131, issue 3, 528-548

Abstract: Using a data set 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. To explain the prevalence of low payment amounts, we exploit changes in issuers’ minimum payment formulas to quantify the explanatory power of two potential theories: liquidity constraints and anchoring. At least 22% of near-minimum payers (and 9% of all accounts) respond to the formula changes in a manner consistent with anchoring as opposed to liquidity constraints alone. Our results show that anchoring to a salient contractual term has a significant impact on household repayment decisions.

Keywords: Anchoring; Liquidity constraints; Credit cards; Consumer finance; Minimum payments (search for similar items in EconPapers)
JEL-codes: D11 D14 G21 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (38)

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Working Paper: Minimum Payments and Debt Paydown in Consumer Credit Cards (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:131:y:2019:i:3:p:528-548

DOI: 10.1016/j.jfineco.2018.09.009

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