Perverse Nudges: Minimum Payments and Debt Paydown in Consumer Credit Cards

What factors impact how much consumers repay on their credit cards each month? This paper examines the drivers of payment behavior using the CFPB credit card database, which includes the monthly account activity of a large fraction of U.S. consumers from 2008-2012. We find that consumers' payment behavior is consistent and strongly bimodal. Most accounts are either paid in full or paid near the minimum amount each month, with very few intermediate payment amounts. We then evaluate the impact of two types of policy changes: 1) changes in the minimum payment formulas implemented by individual issuers, and 2) new payment disclosures mandated by the CARD Act of 2010. The policy changes led to small increases in the payments made by consumers previously paying the minimum. On average, the CARD Act disclosures increased consumer payments by $19 per month from February 2010 to December 2012. However, both the formula changes and the CARD Act's 3-year payment disclosure had the perverse effect of decreasing the fraction of accounts paid in full by 1%. These findings are difficult to reconcile with rational economic models, and imply that setting suggested payments at low amounts lead some consumers to reduce their overall debt payments. Our results suggest that anchoring and the salience of minimum payments play an important role in the credit card market.