Default Effects of Credit Card Minimum Payments

Sakaguchi, Hiroaki; Stewart, Neil; Gathergood, John; Adams, Paul; Guttman-Kenney, Benedict; Hayes, Lucy; Hunt, Stefan

Abstract

Credit card minimum payments are designed to ensure that individuals pay down their debt over time, and scheduling minimum automatic repayments helps to avoid forgetting to repay. Yet minimum payments have additional, unintended psychological default effects by drawing attention away from the card balance due. First, once individuals set the minimum automatic repayment as the default, they then neglect to make the occasional larger repayments they made previously. As a result, individuals incur considerably more credit card interest than late payment fees avoided. Using detailed transaction data, the authors show that approximately 8% of all of the interest ever paid is due to this effect. Second, manual credit card payments are lower when individuals are prompted with minimum payment information. Two new interventions to mitigate this effect are tested in an experiment, prompting full repayment and prompting those repaying little to pay more, with large counter effects. Hence, shrouding the minimum payment option for automatic and manual payments and directing attention to the full balance may remedy these unintended effects.

Citation

Sakaguchi, H., Stewart, N., Gathergood, J., Adams, P., Guttman-Kenney, B., Hayes, L., & Hunt, S. (2022). Default Effects of Credit Card Minimum Payments. Journal of Marketing Research, 59(4), 775-796. https://doi.org/10.1177/00222437211070589

• Journal Article Type: Article
• Acceptance Date: Dec 5, 2021
• Online Publication Date: Dec 17, 2021
• Publication Date: 2022-08
• Deposit Date: Dec 7, 2021
• Publicly Available Date: Dec 17, 2021
• Journal: Journal of Marketing Research
• Print ISSN: 0022-2437
• Electronic ISSN: 1547-7193
• Publisher: American Marketing Association
• Peer Reviewed: Peer Reviewed
• Volume: 59
• Issue: 4
• Pages: 775-796
• DOI: https://doi.org/10.1177/00222437211070589
• Public URL: https://nottingham-repository.worktribe.com/output/6910003
• Publisher URL: https://journals.sagepub.com/doi/pdf/10.1177/00222437211070589