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Minimum Payments and Debt Paydown in Consumer Credit Cards
Open accessAbstract
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 backof-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.
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Tversky, A., & Kahneman, D. (1974) · Science · doi:10.1126/science.185.4157.1124 · Cited by 28,810
Metadata
- Authors
- Keys, B., & Wang, J.
- Affiliations
- National Bureau of Economic Research (US)
- Venue
- National Bureau of Economic Research
- Publisher
- National Bureau of Economic Research
- Published
- 2016-10
- OpenAlex
- W3124521634
- Cited by
- 39
- References
- 1
- Citations by year
- 2025: 2 · 2024: 3 · 2022: 2 · 2021: 4 · 2020: 4 · 2019: 3 · 2018: 12 · 2017: 6
- Type
- report
- Language
- en
- Open access
- green
- doi.org
- Locations
- National Bureau of Economic Research (publishedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Economics, Econometrics and Finance › Finance › Banking stability, regulation, efficiency
- Keywords
- minimum payments, credit cards, anchoring, liquidity constraints, consumer credit, household debt, payment behavior, interest savings
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