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The Hidden Role of Contract Terms: The Case of Credit Card Minimum Payments in Mexico

Author

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  • Paolina C. Medina

    (Mays Business School, Texas A&M University, College Station, Texas 77845)

  • Jose L. Negrin

    (Banco de Mexico, Mexico City 06059, Mexico)

Abstract

This paper argues that thresholds in financial contracts act as implicit nudges in consumers’ decisions. Exploiting a regulatory change to credit card minimum payments in Mexico, we find that a 1-percentage point change in minimum payments leads to a 0.87-percentage point change in actual payments, both expressed as a percentage of total balances. We decompose the effect of minimum payments into a constraining effect and a reference effect. The former captures the effect of minimum payments as a binding constraint and accounts for 59% of its total effect. The latter captures any remaining impact of changes in minimum payments beyond their constraining effect and represents 41% of the total. In turn, 67% of the reference effect is explained by the multiple heuristic : the tendency of consumers to pay whole-number multiples of the minimum payment.

Suggested Citation

  • Paolina C. Medina & Jose L. Negrin, 2022. "The Hidden Role of Contract Terms: The Case of Credit Card Minimum Payments in Mexico," Management Science, INFORMS, vol. 68(5), pages 3856-3877, May.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:5:p:3856-3877
    DOI: 10.1287/mnsc.2021.4006
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    2. Jason Allen & Michael Boutros & Benedict Guttman-Kenney, 2024. "Credit Card Minimum Payment Restrictions," Staff Working Papers 24-26, Bank of Canada.

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