The psychology of credit card repayments
Lead Research Organisation:
University of Warwick
Department Name: Psychology
Abstract
Abstracts are not currently available in GtR for all funded research. This is normally because the abstract was not required at the time of proposal submission, but may be because it included sensitive information such as personal details.
Organisations
Publications
Gherzi S
(2014)
The meerkat effect: Personality and market returns affect investors' portfolio monitoring behaviour
in Journal of Economic Behavior & Organization
Matthews WJ
(2011)
Stimulus intensity and the perception of duration.
in Journal of experimental psychology. Human perception and performance
Navarro-Martinez D
(2019)
Minimum Required Payment and Supplemental Information Disclosure Effects on Consumer Debt Repayment Decisions
in Journal of Marketing Research
Stewart N
(2015)
On the Origin of Utility, Weighting, and Discounting Functions: How They Get Their Shapes and How to Change Their Shapes
in Management Science
Ungemach C
(2011)
How incidental values from the environment affect decisions about money, risk, and delay.
in Psychological science
| Description | The minimum payment on a credit card is included to protect the small group of card holders who would otherwise make no repayment from the effects of compounding interest. The minimum payment is a small fraction of the balance, and card holders are required to repay at least this amount each month. However, we have demonstrated that including minimum payments has an unintended effect on all card holders. Experimental work with hypothetical bills indicates that including a minimum payment on credit card bills reduces the number of people who choose to pay off their bill. Analysis of 1.6 million credit card statements finds that larger minimum payments (e.g., 3% of the balance instead of 2%) decrease the number of people who choose to pay off the full balance of their bill. In the immediately following month, interest charges were estimated to be 10.5% higher as a result, and the final cost will be higher still as interest is added in subsequent months. Thus whilst raising minimum payments may help the small minority of card holders who make repeated repayments of only the minimum, everyone else might be hurt by such a move. While we still do not fully understand the psychological mechanism behind this phenomenon, we have been able to inform the recent changes in the regulation of the credit card industry and help to prevent the negative consequences that would have been associated with a proposed increase in minimum payments to a mandatory 5%. |
| Exploitation Route | See the recent submission to the FCA's credit card market study from Stewart and Gathergood. |
| Sectors | Financial Services, and Management Consultancy |
| URL | http://www.researchcatalogue.esrc.ac.uk/grants/RES-000-22-3339/read |
| Description | Research undertaken by Professor Neil Stewart has taken the phenomenon of "cognitive anchoring" and applied it to real-world issues concerning consumers' attitudes towards debt repayment. Stewart found that including minimum payment information on credit card statements acted as a low cognitive anchor and reduced the size of repayments made. Further, when a minimum payment was included, larger minimum payments were associated with larger repayments. This research has informed government policy development as documented in the 2009 White Paper "A Better Deal for Consumers", and has involved collaboration with the UK Cards Association (the trade association for the UK card payment industry) and 11 leading UK credit card providers. |
| First Year Of Impact | 2009 |
| Sector | Financial Services, and Management Consultancy |
| Impact Types | Economic |