A nudge designed to encourage credit-cardholders to pay more than the monthly minimum amount was meant to help millions of consumers avoid falling into credit-card debt traps. But it didn’t work, according to research led by Chicago Booth PhD candidate Benedict Guttman-Kenney.

In an experiment that involved more than 40,000 consumers, Guttman-Kenney’s team tested a nudge that did result in a dramatic reduction in the number of consumers signing up to automatically pay only the minimum amount on their credit card each month. But the nudge had no effect on the consumers’ credit-card debt (the statement balance less any payments made), spending, total payments, or borrowing costs over the following seven months, the researchers find.

Credit cards are a leading generator of unsecured consumer debt. Such debt is often persistently held and carries high interest rates that can top 20 percent. Outstanding credit-card balances in the United States alone exceeded $1 trillion in 2023. These factors make tackling credit-card debt an important policy issue.

All companies require borrowers to make at least a minimum payment each month, typically 1 percent of the statement balance (plus interest and fees). But past research has established that these minimums can act as a psychological anchor that leads consumers to only pay exactly that amount, or small amounts above it, which is often a costly choice. Twenty percent of UK credit-cardholders are enrolled in the minimum automatic payment option, and they account for 43 percent of total interest and fees across all UK credit cards, according to previous work coauthored by Guttman-Kenney.

A minimal effect on borrowers

Nudging consumers to pay more than the required minimum amount on their credit-card balances—by hiding that option for automatic payments—significantly increased the share of borrowers selecting a fixed amount. However, these cardholders tended to choose to make auto payments in amounts that were only slightly higher than the minimum, the research finds. Moreover, the nudge increased the share of people opting out of autopay, which led to more missed payments.

The latest paper tested a nudge that was designed to remove the minimum payment anchor. The researchers, working with two UK lenders, eliminated the visible minimum payment option during automatic payment enrollment for a nudged group of consumers, who instead only saw the alternatives: they could either enter an amount to pay each month or opt to always pay the balance in full. A control group of consumers saw all three options.

The nudge succeeded in shifting consumers away from paying only the minimum amount, the researchers find. The share of consumers paying only that amount, exactly, fell by 23 percent in the nudged group relative to the control group. The nudge also reduced the share of minimum payments made automatically: while almost 37 percent of borrowers in the control group opted for those automatic minimums, less than 10 percent did in the nudged group.

However, over the seven months of the study, consumers in the nudged group, relative to the control group, did not have lower credit-card debt. They also missed payments at a higher rate while making additional nonautomatic payments at a lower rate, the researchers find.

Digging into the data, the researchers find a reason for the nudge’s failure: consumers just didn’t have the money to pay more. The researchers were able to observe bank account data for a subset of cardholders, and they find that in the 90 days before applying for a credit card, half of those borrowers had no readily accessible cash and, in some cases, had negative balances that resulted from overdraft fees. These bank-account balances predicted the credit-card payment decisions made months later. Consumers who had small positive cash balances before opening their credit cards paid 20 percentage points more of their balances seven months later than those with empty or negative accounts.

“Our study highlights the need to evaluate nudges on their real economic effects,” the researchers write. Even if a nudge successfully harnesses psychological insights to change behavior, notes Guttman-Kenney, it may still fail to change actual economic outcomes.

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