Reframing Behavior: Repayment Rates

Size: px

Start display at page:

Download "Reframing Behavior: Repayment Rates"

Ashley Potter
8 years ago
Views:

1 Reframing Behavior: The Impact of the CARD Act on Cardholder Repayment Rates Dennis Campbell (Harvard Business School) Claudine Gartenberg (Harvard Business School) Peter Tufano (Harvard Business School, D2D Fund, NBER, and Dean Elect University of Oxford Saïd Business School) H A R V A R D B U S I N E S S S C H O O L 1

School) Peter Tufano (Harvard Business School, D2D Fund, NBER, and Dean Elect

2 Summary of preliminary findings 1. We examine four main questions: did disclosures change behavior? Of whom? Persistent? Impact on cardholder debt? 2. Preliminary findings good news i. Fewer payments at minimum amount, on aggregate ii. Someconsumers reframed to the 36month suggestion iii. Reframing consumers appear to be most credit constrained iv. They are somewhat persistent 3. Less positive news i. They are only somewhat persistent ii. Compared dto similar il people who did not adopt plan, they seem to be increasing their amount of debt iii. Moving target 2

Someconsumers reframed to the 36month suggestion iii. Reframing consumers appear to be most credit constrained iv.

3 Research setting and data Affinity Plus Federal Credit Union 132,000 members Portfolio of about 30,000 credit cards 1.3 billion in assets 23 branches within ihi Minnesota Going forward: Replication and extension of study with data from a large national bank Caveat: Not a controlled experiment! 3

3 billion in assets 23 branches within ihi Minnesota Going forward:

4 CARD Act: Plain language disclosures, Financial consequences of decisions 4

5 Empirical evidence on framing effects Framing affects decision making in a variety of contexts 401k choices (Madrian and Shea 2001) Cooperation in experimental settings (Andreoni 1995) Numeric judgments (Mussweiler and Strack 2000) Lab experiments suggest that reframing effects could be substantial for credit cardholders Minimum payment line is excluded for some participants For revolvers, when a suggested minimum payment was given the average repayment was 99 (23% of the balance). When no required minimum paymentwas stated, the repayment averaged 175 (40% ofthe balance (Neil Stewart, The Cost of Anchoring on Credit Card Minimum Payments, Psychological Science 20, (2009) ) 5

line is excluded for some participants For revolvers, when a suggested minimum payment was given the average repayment was 99 (23% of the balance).

6 Empirical predictions With the 36 month disclosure, cardholders have an additional frame.3 Research questions: 1. What if anything are the sizes of these first order impacts? y Relative Frequency Payment/Balance 2. Who changes behavior? Demographic characteristics Previous payment and card usage patterns We would expect to see more payments at 36 month level 3. Are these results persistent? Fewer at minimum level(?) 4. What is the impact on indebtedness? 6

7 Overall, trends in balance per capita and median payoff duration did not significantly change er periods Numb 10 0 Number of payment periods and statement balance Jan 09 July 09 Jan 10 July Balanc ce amount Median # periods until payoff Median balance 7

and statement balance Jan 09 July 09 Jan 10 July 10 2400 25 500 2000 210

8 But there is a noticeable uptake in the fraction of cardholders paying at the 36 month level dholders of total card.04 Fraction o.02 Fraction of customer population at different payment levels 36 month versus placebo amounts 0 Jan 09 July 09 Jan 10 July 10 Payment at 36 month amt Payment at 12 month amt Payment at 3 month amt Payment at 24 month amt Payment at 6 month amt 8

02 Fraction of customer population at different payment levels 36 month versus placebo amounts

9 What do we know about the customers who are following the new disclosure guidelines? 1. Prior implied months to pay off balance 2. Credit utilization 3. Credit score 4. Balance 9

10 1. Implied months to pay off balance: Cardholders who paid more slowly prior to Act adopted 36 month payment more often 36-month uptake by pre-act implied payment durations 0 Fraction.05 of total card dholders Jan 09 July 09 Jan 10 July months months months 8-14 months <7 months 10

implied payment durations 0 Fraction.05 of total card dholders.1.15.

11 2. Credit score: Cardholders with lower credit scores prior to Act adopted 36 month payment more often month uptake by pre-act credit score quintile 0 Fraction of total card dholders.05.1 Jan 09 July 09 Jan 10 July 10 Bottom quintile Third quintile Top quintile Second quintile Fourth quintile 11

15 36-month uptake by pre-act credit score quintile 0 Fraction of total

12 3. Credit utilization: Customers with high balance/limit ratios prior to Act adopted 36 month payment more often 36-month uptake by pre-act credit constraint quintile 0 Fraction of total card dholders Jan 09 July 09 Jan 10 July 10 Bottom quintile, least constrained Third quintile Top quintile, most constrained Fourth quintile Second quintile 12

13 4. High balance: Customers with higher balances prior to Act adopted 36 month payment more often month uptake by pre-act statement balance quintile 0 Fraction of total card dholders Jan 09 July 09 Jan 10 July 10 Highest balance quintile Third quintile Lowest balance quintile Second quintile Fourth quintile 13

15 36-month uptake by pre-act statement balance quintile 0 Fraction of total

14 Using regression analysis, we see that all four of these factors drive uptake of 36 month amount Paid 36 amount Dependent variable: ibl 4+ times Age Gender Duration customer (1) Prior duration of payment amt *** (2)Credit score ** 0 (3) Credit utilization ** (4) Balance *** Constant *** Observations

1374 Duration customer 0.0026 (1) Prior duration of payment amt 0.

15 How does adopting this 36 month guideline impact customer credit behavior and overall indebtedness? Current balance = Pi Prior bl balance + new purchases payments + fees How did adoption affect: 1. New purchases? 2. Payments? 3. Overall total balance? Compared to whom? 15

Current balance = Pi Prior bl balance + new purchases payments +

16 The good news: Customers following 36 month guidelines for 4+ months made fewer new purchases than a matched cohort Purchase utilization for cohort of customers choosing 36 month 4+ times versus propensity-scored matched sample 0 Purcha ases / credit limit Jan 09 July 09 Jan 10 July payments at 36 month amount Matched sample All others 16

month 4+ times versus propensity-scored matched sample 0 Purcha ases / credit limit.02.04.

17 The bad news: Customers following 36 month guidelines for 4+ months made smaller payments than a matched cohort Payment utilization for cohort of customers choosing 36 month 4+ times versus propensity-scored matched sample.1. Payments / 0 P statement 2.3 balance.4.5 Jan 09 July 09 Jan 10 July payments at 36 month amount Matched sample All others 17

month 4+ times versus propensity-scored matched sample.1. Payments / 0 P statement 2.

18 And more bad news: Customers following 36 month guidelines for 4+ months had higher credit balances than a matched cohort Credit utilization for cohort of customers choosing 36 month 4+ times versus propensity-scored matched sample Sta atement ba.3.4 lance / tota.5.6 l credit limit.7.8 Jan 09 July 09 Jan 10 July payments at 36 month amount Matched sample All others 18

4+ times versus propensity-scored matched sample Sta atement ba.3.4 lance / tota.5.

19 The new disclosure rules, as written, are a moving target will they help consumers out of debt? If someone makes no new purchases and pays exactly the 36 month number, they will NOT get out of debt in 36 months: The 36 month amount is recalculated l each month the payoff period will always be 36 months away With 15.32% APR (non reward rate), it will take a member with the average balance ($3900) paying her 36 month amount, followed by minimum minimum amount, 150 months to get out of debt 19

month amount is recalculated l each month the payoff period will always be 36 months away With 15.

20 To summarize: more research, good news and less positive news 1. Research should inform regulation ex ante and ex post This research is preliminary, to be corroborated on second, larger card issuer s data Need to study overall credit consequences for consumer 2. Preliminary findings good news Fewer payments at minimum amount, on aggregate Some consumers reframed to the 36 month suggestion Reframing consumers appear to be most credit constrained They are somewhat persistent 3. Less positive news They are only somewhat persistent Compared to people p who didn t adopt the plan, they seem to be increasing their amount of debt Moving target phrasing 20

21 Reframing Behavior: The Impact of the CARD Act on Cardholder Repayment Rates Dennis Campbell (Harvard Business School) Claudine Gartenberg (Harvard Business School) Peter Tufano (Harvard Business School, D2D Fund, NBER, and Dean Elect University of Oxford Saïd Business School) H A R V A R D B U S I N E S S SC H O OL 21

Neil Stewart. DG FISMA & Which? The Psychology of Credit Card Minimum Payments. neil.stewart@warwick.ac.uk www.stewart.warwick.ac.

Neil Stewart. DG FISMA & Which? The Psychology of Credit Card Minimum Payments. neil.stewart@warwick.ac.uk www.stewart.warwick.ac. DG FISMA & Which? The Psychology of Credit Card Minimum Payments Neil Stewart neil.stewart@warwick.ac.uk www.stewart.warwick.ac.uk Navarro-Martinez, D., Salisbury, L. C., Lemon, K. N., Stewart, N., Matthews,