The key findings from this research paper on credit cards are summarised in this FCA Research Note[1], designed for a broad readership and also covering companion papers Occasional Papers Nos. 42[2], 44[3] and 45[4].
Occasional paper No.43 (PDF)[5]
Summary
We find it is common for consumers who are not in financial distress to make credit card payments at or close to the minimum. This pattern is difficult to reconcile with economic factors but can be explained by minimum payment information presented to consumers acting as an anchor that weighs payments down. Building on Stewart (2009)[6], we conduct a hypothetical credit card payment experiment to test an intervention to de-anchor payment choices. This intervention effectively stops consumers selecting payments at the contractual minimum. It also increases their average payments, as well as shifting the distribution of payments. By de-anchoring choices from the minimum, consumers increasingly choose the full payment amount – which potentially seems to act as a target payment for consumers. We innovate by linking the experimental responses to survey responses on financial distress and to actual credit card payment behaviours. We find that the intervention increases payments made by less financially-distressed consumers the most. We are also able to evaluate the potential external validity of our experiment and find that hypothetical responses are closely related to consumers’ actual credit card payments.
Authors
Benedict Guttman-Kenney, Jesse Leary and Neil Stewart
Disclaimer
Occasional Papers contribute to the work of the FCA by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence that the FCA may use while discharging its functions and to inform its views. The FCA endeavours to ensure that research outputs are correct, through checks including independent referee reports, but the nature of such research and choice of research methods is a matter for the authors using their expert judgement. To the extent that Occasional Papers contain any errors or omissions, they should be attributed to the individual authors, rather than to the FCA.