The share of people’s remaining payment money that optimally should have gone to the card with the highest interest rate
The share that actually went to people’s highest-rate cards
So what were they thinking?
The researchers explored five scenarios:
Balance matching: Making payments proportional to the balances owed on each card
Avoiding max-out: Prioritizing the card that's closest to hitting its credit limit, to avoid penalty fee
Making room: Prioritizing the card that has the most credit room, to enable a large purchase
Biggest balances: Prioritizing the card with the highest balance,to maintain equal balances across cards
Small victory: Prioritizing the cardwith the lowest balance, motivated to have one that’s paid off
They focused mostly on their cards’ balances rather than the interest rates
Looking at consumers with balances on multiple credit cards, the researchers compared people’s actual-payment behavior to a calculation of what the monthly payments would have been had the payment money been divided in proportion to the balances owed on each card. By focusing on balances—which are prominently displayed on credit-card statements, the researchers note—people underpaid their highest-rate cards by more than 20 percentage points.
The ACTUAL-PAYMENT behavior seen in the data most closely fits the BALANCE-MATCHING model developed by the researchers—significantly more so than the other four scenarios they tested.
The research reveals that consumers’ ACTUAL-PAYMENT activity put too little toward their highest-rate cards compared to what the OPTIMAL PAYMENT would have been.
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