Editorial Policy

Credit Card Disclosures May Sway How You Pay

Marcia Frellick

November 14, 2011

If your credit card statement didn’t tell you what your minimum payment was, would you be likely to pay more or less?

A team of international researchers finds in a new report that, left to your own devices, you’d pay more — as much as 24 percent more.

That was one of three main questions researchers evaluated in studying the effect that minimum required payments and long-term information about those payments had on consumers deciding how much to pay on their credit cards each month.

They also studied whether increasing the minimum payment caused people to pay more in general and whether disclosing how long it would take you to pay down your balance if you paid only the minimum (a disclosure now required on statements) inspired people to pay more.

The U.S. researchers on the team were Boston College’s Carroll School of Management Professor of Marketing Kay Lemon and Assistant Professor Linda Salisbury.

They, along with their British counterparts, found that the very appearance of a minimum payment on a statement made it more likely that the consumer would pay only the minimum. The report appears in the current edition of the Journal of Marketing Research.

The experiment replicated results of previous research by another author in the study, University of Warwick psychology researcher Neil Stewart, who found an “anchoring” effect — seen when consumers fixate on the minimum listed and pay less than they would without the information.

The findings in the current study are based on surveys of more than 500 U.S. consumers and an analysis of anonymous data for more than 100,000 British cardholders from 11 different lenders.

Consumers were presented a scenario: Imagine you have a credit card and received your monthly credit card statement this morning. On the next screen you will see the credit card statement, and you will be asked to make your payment. Please consider how much you can afford to pay, and treat your payment decision as you would in your everyday life.

Some consumers’ screens showed the minimum required amount, along with the balance and APR, and some did not show a minimum requirement. Those who had the minimum payment information paid an average of nearly $120 less ($376 instead of $496) on a balance of nearly $2,000 than those who had no information on minimum payment.

There could be several reasons for that, Salisbury said, though causes were not part of the study. One might be that people see minimum payment as a suggestion.

“People might view it as an expectation or a norm of payment,” Salisbury said. “It’s possible they may see it as a recommendation and that might draw it down. It’s also possible that they’re acting on an unconscious level — sort of an unconscious power of suggestion.”

What if the minimum was higher?
Since it’s unlikely any financial institution would get rid of the minimum payment, the study aimed to find out what interventions might help cancel out the “anchor” effect on minimum payments. So they tested increasing the minimum payment amount.

They found increasing the minimum payment amount did, in fact, cause people to pay more. But this worked best for those who typically pay the minimum amount. For those who don’t typically pay the minimum, raising the minimum did not have a significant effect, she said.

They also tested the effect of giving consumers more information and spelling out the impact of paying the minimum in terms of how much total interest they’d have to pay and how long it would take to pay it off. The assumption was that if consumers know the consequence of paying the minimum every month, that might lead them to increase their payment.

But that’s not what the data showed. The researchers found that the disclosures they tested didn’t inspire people in the study to pay more, a finding that counteracts what designers of the Credit CARD Act of 2009 had intended.

In fact, realizing that paying off your debt will come a long time in the future may be sparking an “I’ll never get out of debt” feeling, Salisbury says. “They may think that no matter how much they pay, it will never get paid off.”

The CARD Act now requires such information in a box on the back of each credit card statement.

But Salisbury isn’t ready to say the entire minimum payment warning box isn’t working.

“Another part of that warning, which we don’t thoroughly test here, is the addition of that last row of the box that says if you pay this larger amount it’ll take you only three years … The preliminary evidence of other research I’m doing suggests that that is probably going to be the piece of the minimum payment warning that is effective.”

Disclosures may need refining
Josh Frank, lead researcher for the Center for Responsible Lending, points out that the study doesn’t say that disclosure is bad for the consumer, rather that it alone just isn’t motivating enough to compensate for other factors that drag down people’s payments.

“It’s always good to refine these disclosures as you learn how consumers interpret them and react to them. I don’t think the lesson is don’t disclose this kind of information because I think it does help, but we should track whether it’s helping and policymakers should refine these disclosures as they discover confusion or unexpected behavior by consumers.”

More studies should be done on better ways to present disclosure information on a statement to get across the importance of paying more than the minimum, Frank says.

One possibility might be changing the way that the statement compares the difference in costs of paying off the debt by paying only the minimum versus paying it off in three years.

He gave this example: “Let’s say you have $1,000 you borrowed. And the disclosure says if you keep paying this minimum payment you’ll end up paying $1,500. And if you pay this amount which will pay it off in three years, you’ll pay $1,200. To a lot of consumers, if you compare the totals, $1,200 vs. $1,500 doesn’t sound like a big difference. But really a more correct comparison is to take out the $1,000 principal and think about how much interest you’re paying. In that case the interest is $200 vs. $500 so when you make that comparison and realize the interest is more than double, it’s much more dramatic and an eye-popping amount for consumers to think about.”Th_minimum-payments