Minimum Required Payment and Supplemental Information Disclosure Effects on Consumer Debt Repayment Decisions


 Julianna Charles
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1 DANIEL NAVARROMARTINEZ, LINDA COURT SALISBURY, KATHERINE N. LEMON, NEIL STEWART, WILLIAM J. MATTHEWS, and ADAM J.L. HARRIS Repayment decisions ow muc of te oan to repay and wen to make te payments directy infuence consumer debt eves. Te autors examine ow minimum required payment poicy and oan information discosed to consumers infuence repayment decisions. Tey find tat wie presenting minimum required payment information as a negative impact on repayment decisions, increasing te minimum required eve as a positive effect on repayment for most consumers. Experimenta evidence from U.S. consumers sows tat consumers propensity to pay te minimum required eac mont moderates tese effects; U.K. credit card fied data indicate tat borrowers credit imit and baance due aso moderate tese effects. However, increasing te minimum eve is unikey to competey eiminate te negative effect of presenting minimum payment information. In addition, discosing suppementa information, suc as future interest cost and time needed to repay te oan, does not reduce te negative effects of incuding minimum payment information and as no substantia positive effect on repayments. Tis researc offers new insigts into te debt repayment process and as impications for consumers, enders, and pubic poicy. Keywords: consumer debt, credit cards, financia decision making, information discosure, pubic poicy Minimum Required Payment and Suppementa Information Discosure Effects on Consumer Debt Repayment Decisions *Danie NavarroMartinez is Postdoctora Researc Feow, Department of Economics, University of Warwick (emai: warwick.ac.uk). Linda Court Saisbury is Assistant Professor of Marketing, Carro Scoo of Management, Boston Coege (emai: Katerine N. Lemon is Accenture Professor and Professor of Marketing, Carro Scoo of Management, Boston Coege (emai: Nei Stewart is Professor of Psycoogy, Department of Psycoogy, University of Warwick (emai: Wiiam J. Mattews is a ecturer, Department of Psycoogy, University of Essex (emai: Adam J.L. Harris is Teacing Feow, Division of Psycoogy and Language Sciences, University Coege of London (emai: Te first two autors are isted apabeticay and contributed equay to te researc. Te tird and fourt autors are isted apabeticay and aso contributed equay. Te autors tank Ian Sayer at te U.K. Cards Association for is assistance in compiing te data set used in Study 2. Tis work was partiay funded by te Economic and Socia Researc Counci (U.K.) grant RES Ga Zauberman served as associate editor for tis artice. Consumer debt eves are ig, wit many consumers strugging to pay down teir debts. In te United States, tota consumer debt was $2.4 triion in ate 21, $86 biion of wic was revoving debt. Te average U.S. ouseod as an estimated $7,3 in revoving debt, and credit card oan cargeoff rates ave more tan doubed since 27 (Federa Reserve Board 29, 211). In te United Kingdom, credit cards account for 63.9 biion of consumer debt. Approximatey 47% of U.K. credit cardoders and 56% of U.S. cardoders carry a baance (Department for Business, Innovation and Skis 21; Federa Reserve Bank of Boston 28). In addition, an estimated 13% of U.S. credit cardoders and 14% of U.K. credit cardoders pay ony te minimum required amount eac mont on teir credit cards (Department for Business, Innovation and Skis 21; Federa Reserve Bank of Boston 28). Revoving debt (e.g., credit card debt) grows wen consumers borrow more funds, but debt aso grows as consumers rate of 211, American Marketing Association ISSN: (print), (eectronic) S6 Journa of Marketing Researc Vo. XLVIII (Specia Issue 211), S6 S77
2 Consumer Debt Repayment Decisions repayment sows. Our focus in tis researc is on understanding debt repayment beavior. In financiay deveoped countries, credit cards constitute one of te main devices for consumers to engage in unsecured borrowing. Typicay, eac mont a borrower makes a decision about ow muc of is or er oan to repay. An important mecanism tat credit card firms empoy to prevent borrower defaut is te minimum required payment poicy, wic incudes discosing information about te required minimum payment in borrowers monty credit card bis. Currenty, virtuay every ending institution operates under some minimum payment poicy. Monty minimum payments are typicay cacuated as a sma percentage of te outstanding baance or a sma fixed amount, wicever is arger. For exampe, in te United Kingdom, a minimum of 2.5% or 5 is typica. Cardoders wo fai to repay te minimum are often carged a fee, and te sow repayment eads to greater (compounding) interest costs. To iustrate te impact of minimum payment poicy on debt, imagine a U.K. cardoder wit an outstanding baance of 2,5 under a standard interest rate of 17% annua percentage rate (APR) and a minimum payment poicy of 2% or 5, wicever is arger. Te time it woud take to repay te debt and te tota interest carged over tat period for four different monty repayment strategies are as foows: Repay minimum required every mont Repay 6 every mont Repay 12 every mont Repay 24 every mont 38.4 years to pay off 5.3 years to pay off 2.1 years to pay off 1 year to pay off 5,283 tota interest 1,221 tota interest 434 tota interest 183 tota interest In te case in wic ony te minimum is repaid, te debt decreases extremey sowy, and te tota interest carges are extremey ig. Tus, debt can easiy get out of contro if consumers make ony minimum repayments. Te situation canges dramaticay if consumers instead repay a moderatey iger amount tan te minimum eac mont. From te ender perspective, tese consumer repayment decisions can aso significanty infuence te firm s revenues and profitabiity. Minimum payments on credit card debt are controversia and ave aso been te focus of severa reguations. Some U.S. and U.K. institutions ave recenty proposed increases in minimum payments. A prominent exampe is te cange from 2% to 5% in minimum payments tat Case Bank, one of te argest credit card issuers in te United States, impemented in 29. Anoter case is tat of a wite paper te Department for Business, Innovation and Skis (29) presented to te Britis Pariament, in wic it proposed a mandatory increase in minimum payments to te eve of 5% (te proposa as since been rejected). Te recenty enacted U.S. Credit Card Accountabiity, Responsibiity and Discosure (CARD) Act of 29 (H.R. 627, S.414) requires enders to incude a minimum payment warning in a monty credit card statements. Tis warning discoses information to consumers on every monty credit card statement, incuding te tota interest cost and S61 te amount of time it wi take to pay off te card baance if consumers ony make minimum monty payments (ereinafter referred to as suppementa information ). Bot types of interventions raising te minimum payment eve and discosing suppementa information aim to increase monty repayment amounts. We examine te efficacy of eac approac in tis researc. Litte researc as examined te effects of minimum payment poicies and oan cost information discosure on individuaeve consumer repayment decisions. It seems ikey tat increasing minimum requirements or providing suppementa oan cost information woud infuence consumers wo woud oterwise repay ony te minimum. However, minimum payment poicies and cost information coud aso ave unintended effects on te arger group of consumers wo tend to make iger repayments tan te minimum. Stewart (29) finds tat te mere presence of minimum required payment information on a monty credit card statement eads consumers to make ower monty credit card repayments tan if te information were not present. Tis finding (wic we repicate wit U.S. consumers) suggests tat te current practice of requiring a minimum payment as a negative effect on consumer repayment beavior, and it cas into question weter or ow te presence of oter reevant information wi affect debt repayment. To understand ow minimum payment poicy and oan information infuence consumers repayment decisions, we examine te effect of varying te eve of minimum payment required and discosing tree specific types of information: te minimum payment required, oan interest costs, and engt of time to pay off te oan. Empoying a mutimetod approac two controed experiments wit U.S. adut consumers and fied data from 11 U.K. enders we find tat increasing minimum required payment eves as positive effects on repayment decisions for most consumers. Tese effects are moderated by borrowers credit imit, baance due, and propensity to pay te minimum required. Our experimenta findings aso suggest, owever, tat increasing te minimum payment eve is unikey to eiminate te strong negative effect of merey presenting minimum payment information. Finay, we find no evidence tat discosing suppementa oan information to consumers yieds positive effects on repayment decisions. Tis researc offers important impications for marketing practice and pubic poicy by providing insigts into te foowing questions: Wat information soud enders discose or make saient to consumers? Wat minimum payment poicies migt reduce te firm s credit risk by reducing defaut rates? and How can pubic poicy makers strengten interventions to improve consumer financia decision making? CONCEPTUAL BACKGROUND Debt repayment decisions entai te consumer coosing bot ow muc and wen to repay a oan. A reativey smaer payment aows te borrower to ave more cas on and to use for oter purposes in te current mont but, because of compounding interest rates, increases te future (and, tus, tota) cost of te oan. A reativey arger payment eaves te consumer wit ess money avaiabe in te current mont but reduces te future cost of te oan. Tus,
3 S62 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE 211 te consumer must decide weter to repay more now (decreasing current utiity) or repay more ater (decreasing future utiity). As suc, te debt repayment decision can be conceived of as a tradeoff between te desires to minimize current cost and minimize future, tota cost over te ife of te oan. Tus, saience of tese costs soud ave an important impact on te repayment decision. Saience can be infuenced by te decision context, suc as te type of information avaiabe to te consumer at te time te decision is made, wic, in te case of revoving debt, is typicay once per mont. In addition to minimum payment information, credit card enders typicay provide interest cost information in terms of compound APR, but researc sows tat consumers ave difficuty understanding interest compounding (Eisenstein and Hoc 27; Stango and Zinman 29), and a surprisingy arge number of consumers ave poor knowedge of te cost of credit (Lee and Hogart 1999). Tis is particuary probematic for borrowers of fexibe oans tat do not require te oan to be paid off witin a fixed period. Estimating fexibe oan duration is difficut for consumers, toug interest cost information improves accuracy in some cases (Ranyard and Craig 1993). Stewart (29) reports resuts from a U.K. credit card repayment experiment, wic sows an important, unexpected association between minimum payment and repayment beavior. In a ypotetica scenariobased experiment, using fictitious credit card bis presented to cardoders, e finds tat omitting minimum payment information from te statements ed to significanty iger repayments. Stewart inks tese patterns wit te psycoogica penomenon of ancoring (Tversky and Kaneman 1974; for a simiar suggestion, see Taer and Sunstein 28), suggesting tat te presence of minimum payment information eads consumers to ancor on tat sma amount and tus make a smaer repayment. Just as consumers use te credit imit information suppied by credit card enders as an informative signa of teir future earnings potentia and abiity to repay (Soman and Ceema 22), so may debtors interpret minimum payment information as a signa of te amount tat woud be appropriate for repaying te oan in a timey manner. Suc information migt aso be construed as a payment recommendation or impicit payment norm (McKenzie, Liersc, and Finkestein 26; Wansink, Kent, and Hoc 1998). Aternativey, increased attention to minimum payment information may increase saience of current costs and te desire to minimize tem, eading to ower repayment. Eac of tese perspectives offers possibe contributory mecanisms for te negative effects of minimum payment information. Atoug testing aternative expanations is outside te scope of tis researc, teasing apart tese contributing factors is an important avenue for furter researc. Tis researc aims to identify practica pubic poicy or ender interventions tat ave te potentia to mitigate te negative effects of discosing minimum payment information on repayment. One potentia approac is to increase te minimum required eve, effectivey increasing te size of te ow ancor. Tis approac is ikey to increase repayment, especiay for borrowers prone to paying te minimum required amount eac mont. If te minimum payment acts as a signa or recommendation, increasing its vaue is ikey to increase te repayment amount. A second approac is to discose oter suppementa oan information, suc as future interest cost and time to pay off te oan, simiar to tat reported in te CARD Act. A weat of researc in intertempora decision making as sown tat for decisions invoving tradeoffs of costs and benefits over time, consumers typicay weig immediate outcomes more eaviy tan distantfuture outcomes (for reviews, see Frederick, Loewenstein, and O Donogue 22; Read 24). Tis migt be te case for te consumers wo pay ony te minimum amount required every mont, aowing te future cost of te oan to increase. If consumers weig current (versus distant) outcomes more eaviy, discosing information tat makes future outcomes more saient may ead tem to sift more weigt toward consideration of future costs. Information about future oan interest cost soud bring debtors attention to te ongterm costs of paying ony te minimum required. Tis woud sift repayment considerations away from te minimum payment, potentiay increase consideration to minimize future costs, and dampen te negative effect of minimum payment information on current repayment amount. Te ancoring perspective woud suggest a simiar prediction, in wic use of a considerteopposite strategy migt reduce ancoring (Mussweier, Strack, and Pfeiffer 2). Prior researc aso suggests tat discosing te time needed to pay off te oan affects repayment decisions. As goa proximity increases, effort toward attaining te goa increases (Kivetz, Urminsky, and Zeng 26). Tus, prompting consumers to ook aead to ow far tey are from paying off teir oan suc as time needed to pay off a credit card baance wen ony te minimum required amount is paid eac mont coud affect teir motivation and effort to repay te debt (Ceema and Bagci 211). If te time to repay te oan is proxima, tis woud increase motivation to pay off te baance due and increase current repayment amount. For borrowers wit ig baances and ow minimum required payment eves, suc information woud indicate a very distant time orizon toward acieving teir goa, reducing effort and repayment amount. In summary, minimum payment poicy and te information discosed to te consumer at te time of repayment soud affect repayment decisions. We examine te effects of varying minimum required payment eves, as we as providing suppementa information, on te consumer repayment decision. We expect te presence of minimum payment information to ave a negative impact on repayment, as in prior researc, but we aso expect tat effect to be moderated by increasing minimum requirement eves as we as discosing suppementa information about future oan cost and time required to pay off te oan baance. We conducted studies to test tese ideas: two experimenta studies of U.S. consumers and a fied study tat examines credit card customers in te United Kingdom. STUDY 1: EXPERIMENTS Prior researc wit U.K. consumers reveas a negative effect of presenting minimum payment information on repayment amount (Stewart 29). Our goa in Study 1 is to examine te effects of minimum required payment information and poicy on U.S. consumers and aso to examine te effects of discosing oter oan cost information
4 Consumer Debt Repayment Decisions S63 to borrowers. To tis end, we conducted two controed experiments tat expored tree questions: (1) Does te presence of minimum payment information ave a negative effect on repayment for U.S. consumers? (2) Does increasing te minimum required payment eve affect repayment amount? and (3) Does presenting suppementa information namey, oan interest cost and payoff time duration information mitigate or enance te effects of minimum payment information on consumers debt repayment decisions? Study 1a: Presenting Minimum Payment Information to U.S. Consumers We tested weter te negative effect of presenting minimum payment information observed wit U.K. consumers (Stewart 29) woud be repicated for a sampe of U.S. adut consumers and for a (iger) credit card baance due eve coser to te U.S. average. To accompis tis, we conducted a twoce betweensubjects experiment simiar to Stewart (29). A random sampe of 127 U.S. adut consumers were presented wit one of two ypotetica monty credit card statements and asked to make a repayment decision. Participants were randomy assigned to eac condition: (1) te minimum payment absent condition, wic incuded information about te baance due and te APR and (2) te minimum payment present condition, wic aso incuded minimum required payment information (see Figure 1). Information on te statements. We cose te information on te statements to be consistent wit vaues typica at te time of te study. Te same account baance was presented to a participants: $1, We cose tis vaue because it represented te average credit card baance for U.S. ouseods at te time, and we wanted to avoid using any round numbers or oter vaues tat woud not be typica in a credit card statement. We set te APR vaue at 14%, wic represented an approximate average APR at te time of te study (Federa Reserve Board 21); tis was aso presented to a participants. We cacuated te Figure 1 STUDY 1A: MINIMUM PAYMENT INFORMATION PRESENT CONDITION Credit Card Statement Apri 29 Account Number Annua Percentage Rate (APR): 14.% Current Tota Account Baance: $1, Minimum Required Amount: $38.74 How muc wi you pay (in doars)? $ minimum required payment amount as 2% of te baance due, or $38.74, wic again refects common practice for U.S. credit card enders at te time; tis appeared ony in te minimum payment present condition. Procedure. A random sampe of adut consumers received an emai informing tem of te study and inviting tem to participate by cicking on te URL ink embedded in te invitation. Participants competed te repayment decision task before te rest of tasks presented to tem. In bot conditions, tey read te same instructions, as foows: Imagine you ave a credit card and received your monty credit card statement tis morning. On te next screen, you wi see te credit card statement, and you wi be asked to make your payment. Pease consider ow muc you can afford to pay, and treat your payment decision as you woud in your everyday ife. Participants ten saw a credit card statement (suc as tat in Figure 1) and entered teir desired repayment amount at te bottom of te statement. Measures. Te repayment decision is infuenced by te extent to wic a consumer considers and compreends current and future oan costs. Tus, a person s tempora orientation and knowedge of interest compounding soud infuence repayment beavior. We measured bot after te decision task to contro for teir impact on repayment beavior in our anayses. Prior researc as sown tat decision makers predisposition toward considering more immediate concerns versus future concerns infuences credit card debt (Joireman, Kees, and Sprott 21) and fisca responsibiity (Joireman, Sprott, and Spangenberg 25). We measured predisposition toward consideration of future consequences (CFC) using Stratman et a. s (1994) 12item scae (Cronbac s = 81). Eac scae item used a sevenpoint Likert format (1 = extremey uncaracteristic, and 7 = extremey caracteristic ); scae items appear in Appendix A. Financia knowedge is aso ikey to infuence repayment decisions because it affects a person s abiity to compreend oan cost information. Evidence suggests tat a surprisingy arge number of consumers ave poor knowedge of te cost of credit (e.g., Lee and Hogart 1999). Revoving debt growt is directy infuenced by interest rates and te speed of repayment reative to compounding interest growt. Tus, we were specificay interested in controing for consumers knowedge of interest compounding, wic prior researc as sown to be acking (Eisenstein and Hoc 27; McKenzie and Liersc 211; Stango and Zinman 29). We measured objective knowedge of interest compounding using tree quizstye questions in a manner simiar to Lipkus, Samsa, and Rimer s (21) numeracy measure. Knowedge vaues can range from to 3; te questions appear in Appendix A. Finay, we measured annua ouseod income, using a 15point scae ranging from 1 ( ess tan $2, ) to 15 ( $15, or greater ), increasing in $1, increments. Tabe 1 provides a description of our consumer sampe and summary measures. Resuts. A oneway anaysis of variance (ANOVA), wit ogtransformed repayment amount as te dependent variabe, reveaed a significant, negative effect of te presence of minimum payment information on repayment amount
5 S64 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE 211 Tabe 1 STUDY 1: CONSUMER SAMPLE DESCRIPTION AND SUMMARY MEASURES Summary Measures Study 1a Study 1b Sampe size Percentage of men Percentage of women Median age years years Median education Some coege Some coege Median income $4, $49,999 $5, $59,999 Average number of credit cards Average current $1, $1, baance, most frequenty used card Knowedge of interest compounding, {2.5, 27., 27., 25.4} {17.1, 29.9, 28.5, 24.5} proportion (%) at eves {, 1, 2, 3} Proportion wo paid 13.39% 27.3% fu baance due Proportion wo paid 9.45% 8.52% minimum required or ess Average repayment, a $ $667.1 Average repayment, revovers ony $24.87 $ Notes: Proportion wo paid minimum required or ess assumed a minimum amount of $38.74 for a conditions except te 5% minimum required condition in Study 1b, wic assumed $ Revovers refers to participants wo paid ess tan te fu baance due. Education eve was measured wit ordina categories; some coege was te median vaue. (F = 6 2, p < 2) across a participants. 1 Wen we excuded participants wo paid te fu baance, te negative effect was even stronger (F 1 96 = 9 95, p < 3). Consistent wit prior researc (Stewart 29), participants tended to pay ess wen minimum payment information was present (versus absent), after we controed for differences in tempora orientation, knowedge of interest compounding, and income eve. Participants in te condition wit minimum payment information present paid an average $ ess tan tose in te condition for wic te information was absent (M MR present = $376 39, M MR absent = $496 21), and a simiar difference in median vaues occurred ($5 vs. $175, respectivey). Finay, a nonparametric Mann Witney test confirmed significant differences between te two conditions (z = 2 49, p < 2). Tus, te negative effect of minimum payment information on repayment amount tat Stewart (29) finds wit U.K. consumers aso occurred in our sampe of U.S. consumers. Study 1b: Potentia Lender Interventions Study 1a confirms tat presenting minimum payment information as a negative impact on repayment for U.S. consumers, and tis negative impact is robust to controing 1 We use te ogaritmic transformation of observed repayment amount to reduce positive skewness; for ease of exposition, we refer to tis simpy as repayment amount trougout te remaining discussion. for key differences across consumers. At te same time, as a practica matter, bot enders and poicy makers woud ikey counter tat some minimum required payment is necessary. Tus, te goa of Study 1b is to test two types of potentia ender interventions aimed to mitigate te negative effect of minimum payment information on repayment decisions: increasing te minimum required payment amount and discosing suppementa oan cost information. We conducted a betweensubjects experimenta design wit a U.S.based onine consumer pane. A random sampe of 481 U.S. adut consumers was presented wit one of seven different ypotetica monty credit card statements and made a repayment decision. Figure 2 iustrates an exampe of one condition: time to pay off te oan. We designed te seven information conditions to enabe testing of five specific interventions: increasing te minimum required payment eve (Conditions 1 3) and discosing future interest cost, discosing time to pay off te oan, discosing future interest cost and time to pay off togeter, and discosing time to pay off wit information about te monty repayment amount needed to pay off te oan in tree years (Conditions 1, 2, 4 7). Participants were randomy assigned to one of te foowing information conditions (Conditions 2 7 aso incuded baance due and APR information, just as in te contro): 1. Te contro condition incuded information about te baance due and te APR; 2. Te 2% minimum condition incuded information about te minimum required payment amount, using 2% of te baance due as te minimum required eve; 3. Te 5% minimum condition incuded information about te minimum required payment amount, using 5% of te baance due as te minimum required eve; 4. Te future interest cost condition incuded te 2% minimum payment information and information about te future tota interest cost tat woud be incurred if te 2% minimum payment were made every mont unti te baance was paid off; Figure 2 STUDY 1B: TIME TO PAY OFF CONDITION Credit Card Statement December 21 Account Number Current Tota Account Baance: $1, Annua Percentage Rate (APR): 14.% Minimum Required Amount: $38.74 Number of years unti Baance is paid off if you pay te minimum required amount eac mont: How muc wi you pay (in doars)? $ 19 years
6 Consumer Debt Repayment Decisions 5. Te time to pay off condition incuded te 2% minimum payment information and information about te number of years needed to pay off te baance if te 2% minimum payment were made every mont; 6. Te future interest cost and time to pay off condition incuded te 2% minimum payment information, future tota interest cost information, and time to pay off information; 7. Te time to pay off and treeyear payoff condition incuded te 2% minimum payment information, time to pay off information, and information about te monty repayment amount needed to pay off te current baance in tree years (described in more detai subsequenty). Information manipuation vaues. Our information manipuation vaues were consistent wit Study 1a; some conditions incuded additiona oan cost information as we describe ere. A participants saw te same account baance due, $1,937.28, and APR vaue, 14%. We cacuated te minimum required payment amount as eiter 2% of te baance due, or $38.74, as in Study 1a, or 5% of te baance due, or $96.86 (for te 5% minimum condition ony). We cacuated bot te future interest cost, $2,159.2, and te number of years to pay off te baance, 19 years, assuming monty interest compounding and a 2% minimum payment, or $1, wicever is arger, is paid in eac future mont. Finay, mimicking te CARD Act minimum payment warning, te time to pay off and treeyear payoff condition incuded information about te monty repayment amount required to pay off te current baance in tree years: $66.21 every mont for tree years. 2 Te experimenta procedure was identica to tat in Study 1a. Measures. As in Study 1a, we measured individua differences in CFC (Cronbac s = 84), objective knowedge of interest compounding, and income. 3 In addition, we assessed weter our information manipuations affected participants differenty depending on past repayment beaviors wit teir own credit card oans. We asked participants te extent to wic tey tended to pay ony te minimum required amount eac mont for teir own credit cards, using a sevenpoint Likert scae ( I often make ony te minimum payment on my credit card bis ; 1 = strongy disagree, and 7 = strongy agree ). Tabe 1 provides a description of te consumer sampe and summary measures. Resuts: effects of increasing minimum payment eve. We examined te impact of increasing te required minimum payment eve. We anayzed te 2% minimum, 5% minimum, and contro conditions to estimate te effect of varying minimum payment requirements on repayment beavior (controing for CFC, knowedge, and income in a anayses). Using a oneway ANOVA, wit ogtransformed repayment as te dependent variabe, we found a significant effect of te minimum payment manipuation (F = 4 7, p < 2). Furtermore, an ordinary east squares regression anaysis indicated tat, after we 2 Te CARD Act minimum payment warning incudes information about te monty payment amount required to pay off te entire baance in tree years. Given te $1, baance due and 14% APR in our scenario, te monty amount woud be $ We aso measured consumers attitude toward debt and found tat it was statisticay insignificant in a our anayses; tus, for te sake of parsimony and brevity, we omit if from our discussion and anayses reported ere. S65 controed for te presence of minimum payment information, no statisticay significant main effect of increasing te minimum required eve occurred (presence of minimum payment information: t = 2 21, p < 3; minimum payment eve: t = 7, p > 48). Tabe 2 iustrates te mean differences between conditions. A nonparametric Kruska Wais test confirmed te statisticay significant differences across te tree conditions ( 2 2 = 7 537, p < 3), and a Mann Witney test reveaed statisticay significant differences between te contro and 2% minimum conditions (z = 2 229, p < 3) but no statisticay significant difference between te 2% minimum and 5% minimum conditions (z = 161, p > 87). We aso assessed weter borrower eterogeneity as a moderating infuence on minimum payment eve effects. More specificay, te effect of increasing te minimum required payment amount may vary for consumers wit different incinations to repay ony te required minimum. We tested tis prediction by adding an additiona independent variabe to our regression: participants sefreported propensity to make te minimum required payment every mont (recoded to range from to 6, for anaysis purposes). Te resuts, summarized in Tabe 3, sow a significant, negative effect of propensity to pay te minimum (PPM: t = 4 3, p < 1); tis is te simpe effect of propensity to pay te minimum for te case in wic no minimum payment information is present. More important, we found a significant, negative interaction between propensity to pay te minimum and te presence of minimum payment information (MR PPM: t = 2, p < 5) and a significant, positive interaction wit minimum required eve (MR5 PPM: t = 3, p < 4). Te MR5 PPM interaction coefficient in Tabe 3 estimates te extent to wic te effect of increasing te minimum eve from 2% to 5% varies wit borrowers propensity to repay ony te required minimum. We conducted a spotigt anaysis to unpack tis moderating effect. We summarize te estimated effect of increasing te Tabe 2 STUDY 1B: REPAYMENT BY INFORMATION CONDITION Proportion Proportion Paying 2% Paying 5% Proportion Mean Mean Information of Baance of Baance Paying Repayment Repayment Condition or Less or Less Fu Baance A ($) Revovers ($) Contro % minimum % minimum Future interest cost (IC) Time to pay off (TP) IC and TP TP and treeyear payoff payment Notes: Revovers refer to participants wo paid ess tan te fu baance due.
7 S66 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE 211 Tabe 3 STUDY 1B: THE EFFECT OF MINIMUM PAYMENT LEVEL ON REPAYMENT Mode Variabe Coefficient SE t pvaue Minimum payment information present (MR) Minimum increase from 2% to 5% (MR5) Propensity to pay minimum required (PPM) MR PPM MR5 PPM CFC Knowedge of interest compounding Income Intercept Notes: Te dependent variabe is te ogaritmic transformation of repayment; mode R 2 = 393. Independent variabes, MR and MR5, are coded as 1 indicator variabes. PPM required is recoded to range from to 6 for tis anaysis. Bodface indicates statistica significance at te 5% eve. minimum eve from 2% to 5% (MR5) at ow, moderate, and ig PPM eves as foows: Estimated Effect of Spotigt Test of PPM MR5 on Repayment Significance 32 t = 1 26, p > = 952 t = 2 65, p < = t = 2 99, p < 1 Consistent wit Figure 3, Pane A, increasing minimum payment eve is estimated to ave a positive effect for borrowers wit a moderate (t = 2 65, p < 1) to ig (t = 2 99, p < 1) propensity to pay te minimum required. However, te effect of MR5 was nonsignificant (t = 1 26, p > 2) for borrowers wit a ow propensity to pay te minimum required. A simiar spotigt anaysis of te estimated effect of presenting minimum payment information (MR) at ow, moderate, and ig propensity to pay te minimum eves indicates significant, negative effects at a eves (ow/: b = 495, t = 2 9, p < 4; moderate/3: b = 1 311, t = 3 64, p < 1; ig/6: b = 2 127, t = 2 9, p < 1). 4 Tese resuts indicate tat presenting minimum payment information as a negative effect on repayment amount, and tis effect increases in magnitude (i.e., becomes more negative) as te debtor s propensity to pay te minimum required increases. In addition, te estimated effect of increasing minimum payment eve is positive for borrowers wose propensity to pay te minimum is moderate to ig. Tis is not te case for borrowers wit a ow propensity to pay ony te minimum; tis group of borrowers does not increase repayment wit minimum payment 4 Casua observation suggests a smaer simpe effect of te presence of minimum payment information at ig (5 6) tan at moderate (2 4) propensity to pay te minimum in Figure 3, Pane A, wic is contrary to te arger effect size reported for ig propensity to pay te minimum in our spotigt anaysis. Tis contrast is due to te use of og(repayment) in te regression anaysis, but not in Figure 3, Pane A. Proportion Paying Minimum or Less (%) Mean Repayment Amount ($) Figure 3 STUDY 1B: EFFECTS OF MINIMUM LEVEL AND SUPPLEMENTAL INFORMATION A: Mean Repayment Amount by Minimum Payment Condition and PPM B: Proportion of Participants Repaying te Minimum or Less ,2 1, Contro 1 (Low) 2 4 (Moderate) 5 6 (Hig) Minimum Payment Ony PPM Future Interest Cost (IC) Time to Pay Off (TP) Contro 2% Minimum 5% Minimum IC + TP TP + 3Yr Payoff Notes: A conditions, except Contro, ave 2% minimum payment information. eve. Te nonsignificant decrease in simpe mean repayment depicted in Tabe 2 from $695.3 to $ for a participants and from $ to $146.6 for revovers masks tis moderating effect of propensity to repay te minimum on te reationsip between minimum payment eve and repayment amount. Resuts: discosing suppementa information. We tested weter presenting suppementa interest cost information and/or payoff duration information woud mitigate te negative effect of minimum payment information. To tis end, we performed anayses of six of te experimenta conditions: 2% minimum, future interest cost, time to pay off te oan, future interest cost and time to pay off, time to pay off and treeyear payoff information, and te contro condition. A but te contro condition incuded a 2% minimum payment eve (a typica eve for U.S. enders). Unexpectedy, our anaysis did not uncover any significant mitigating effects of additiona information on
8 Consumer Debt Repayment Decisions repayment (see Figure 3). A oneway ANOVA, wit ogtransformed repayment amount as te dependent variabe, sowed a significant effect of information manipuation across conditions (F = 2 84, p < 2). Tis is consistent wit a nonparametric Kruska Wais test indicating significant differences across te six conditions ( 2 5 = , p < 1). However, tis significant effect refects ony te impact of incuding a minimum payment on te bi (repicating Study 1a). An ordinary east squares regression, parsing out te effects of minimum payment information from oter information types, sowed a significant, negative effect of presenting minimum payment (t = 2 16, p < 4), but after we controed for minimum payment information, no significant effects of future interest cost, time to pay off, or treeyear information occurred (a p > 18). Simiary, a Kruska Wais test for just te five suppementa information conditions indicated no significant difference across conditions ( 2 4 = 2 398, p > 66). Finay, we tested propensity to pay te minimum as a moderator of information effects but found no significant interaction effects. Our anayses tus far suggest tat none of te suppementa information manipuations reduced te negative effects of incuding minimum payment information on te bi. Terefore, we conducted additiona anayses to examine more cosey weter suppementa information affects debtors ikeiood of repaying te minimum required amount, making a partia repayment, or repaying te fu baance due. We examined tis question using a series of tree ogit modes. First, we estimated an ordered ogit mode, wit tree (ordered) payment categories as te dependent variabe: repay te minimum required or ess, repay more tan te minimum but ess tan te fu baance (a partia repayment), and repay te fu baance. Te observed portion of participants repayment decisions faing into eac of te tree categories was 6.9%, 66.26%, and 26.85%, respectivey. Te mode resuts revea a significant, negative effect of future interest cost information (Tabe 4; p < 4) and a arger significant, positive interaction effect between future cost information and time to pay off information (p < 3). Te presence of future cost information decreased te ikeiood of a participant being in a iger repayment category, but te effect was mitigated wen time to pay off information appeared wit S67 future interest cost. We found a marginay positive effect of discosing treeyear payoff information, but te effect did not acieve statistica significance (p > 6). Te effects of a oter information types, incuding minimum payment information, were nonsignificant. We foowed up te ordered ogit anaysis wit two binary ogit modes, one tat predicts te ikeiood of paying te minimum required amount (or not) and one tat predicts te ikeiood of paying te fu baance due (or not). We found no statisticay significant effects of our information manipuations on te ikeiood of paying te baance in fu (a p > 9). However, we found a significant, positive effect of future interest cost information on te ikeiood of paying ony te minimum required amount (Tabe 4; p < 4). Tis effect was moderated by a significant, negative interaction effect wit time to pay off information (p < 3): Wen information about time to pay off te baance appeared wit future interest cost, te effect of future interest cost was mitigated. Tus, participants were more ikey to pay te minimum required wen future interest cost was discosed but not if te information was aso accompanied by time to pay off information (see Figure 3, Pane B). Resuts summary. Te information avaiabe to consumers at te time tey decide infuences teir repayment decisions. We examined weter increasing minimum required payment eve or presenting suppementa oan cost information woud ave a positive effect on repayment and mitigate te negative effects of minimum payment information on repayment. We found a significant interaction between minimum payment eve and propensity to pay te minimum required amount: Te resuts indicate a positive effect of increasing te minimum eve for borrowers wit a moderate to ig propensity to pay te minimum and a nonsignificant effect for borrowers wit a ow propensity to pay te minimum. Tese findings igigt te importance of considering borrower eterogeneity in setting minimum payment poicy. We aso found tat, overa, discosing suppementa information about interest cost and time to pay off te oan did not significanty attenuate te negative effects of presenting minimum payment information. Furtermore, discosing future interest cost information increased te ikeiood tat consumers woud pay ony te minimum Tabe 4 STUDY 1B LOGIT MODEL ESTIMATES: SUPPLEMENTAL INFORMATION EFFECTS Ordered Logit: Likeiood of {Minimum, Partia, Fu} Binary Logit: Likeiood of Repaying Minimum Mode Variabe Coefficient SE pvaue Coefficient SE pvaue Minimum payment information present Future interest cost (IC) Time to pay off (TP) IC TP Treeyear payoff CFC Knowedge Income Intercept Notes: Te ordered ogit ogikeiood is ; te binary ogit ogikeiood is Minimum refers to minimum required payment or ess. Bodface indicates statistica significance at te 5% eve.
9 S68 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE 211 amount required. However, wen information about time to pay off te baance appeared togeter wit future interest cost information, te effect was mitigated. Tis finding suggests a cautionary note regarding te effectiveness of reguation requiring discosure of simiar types of oan cost information for canging borrower beavior. STUDY 2: CREDIT CARD REPAYMENT FIELD DATA Study 1 suggests tat te effect of minimum required payment eve on repayment amount decisions is positive for some consumers, but te effect is moderated by consumers propensity to pay te minimum eac mont. Tis underscores ow different types of consumers can beave differenty under te same intervention. Our goa in Study 2 is to furter examine te effects of minimum required payment poicy using rea credit card repayment transactions for U.K. credit card customers. Specificay, we examine te extent to wic variation in minimum payments is reated to reaword repayment beavior. In doing so, we aso expore weter borrowers credit imit and oan baance moderate te infuence of minimum payment on repayment decisions. We begin wit a description of te data, foowed by our modeing approac and resuts. Data We use credit card transaction data anonymousy provided by 11 different U.K. credit card providers troug te UK Cards Association in September 29 (ereinafter denoted as Providers A troug K). Te data sampe incudes 955,14 credit card statements from 16,554 different credit cardoders, and te records span a period of 21 monts. We excuded cardoders wit accounts paid by automatic (predetermined) repayment and tose wit promotiona rates and baance transfers from te sampe to avoid mixing genuine monty repayment decisions wit oter forms of repayment ess reevant for our purposes. Our anayses focus on four variabes: oan baance, minimum payment, credit imit, and actua repayment amount. Tese are te reevant variabes for wic we received fu information from a te credit card companies. No demograpic information was provided for te consumers in our data set. Minimum payment poicy structure. Minimum payment poicies consist of a sma predetermined percentage (between 1% and 5%) to be appied to te outstanding baance, or a sma fixed amount (most often 5) to be paid if te corresponding percentage fas beow te fixed amount. An important consequence of tis is tat if a particuar cardoder as, for exampe, a ow outstanding baance of 2, under a minimum payment poicy of 2% or 5, wicever is arger, te cardoder wi face an actua minimum of 5, wic represents 25% of te baance (not te predetermined 2%). Portions of our credit card statements ave tese sma fixed amounts, representing widey varying percentages of te outstanding debt, and 99% of tose statements ave a minimum payment poicy wit te same fixed amount minimum of 5. In addition, te percentages of te baance tese fixed amount minimums represent are perfecty correated wit te size of te baance. For tese reasons, we focus our anaysis on te repayment decisions made wen borrowers were presented wit te predetermined percentages as minimums (n = 62 85). 5 Credit card provider types. Tabe 5 provides te number of observations for eac of te different minimum payment poicies and providers contained in our data set. Note tat most of te variabiity in minimum payment poicies occurs between providers; singepoicy providers constitute te majority of our observations. However, tree providers B, F, and H ave a considerabe amount of witinprovider variation in teir poicies. Tese poicyvarying providers are aso distinct in tat teir overa correation between stipuated minimum payment eve and credit imit is quite ig, negative, and statisticay significant ( = 43, p < 1). Tat correation fas drasticay among te singepoicy providers ( = 7, p < 1). Credit imit can serve as a proxy for key indicators, suc as credit score and income, or as an internay determined risk measure by te financia institution (Sconick, Massoud, and Saunders 28). Tese factors suggest tat te poicyvarying providers are using criteria reated to credit imits to cassify more risky customers into poicies wit iger minimum payment eves. Suc a segmentation sceme can greaty distort te actua reationsip between minimum payment eves and repayment beavior. Tus, te anayses separatey consider tese two groups: singepoicy providers, wic do not vary teir minimum payment poicy across customers, and poicyvarying providers, wic do vary teir minimum payment poicies across customers. Descriptive Statistics Figure 4 dispays te overa distribution of outstanding baances, credit imits, and reative repayments (actua repayment/baance) for a statements and aso for tose excuding fixed amount minimums. Te distribution of outstanding baances is strongy positivey skewed (Figure 4, Pane A). Credit imit dispays a more normaike distribution, toug it is somewat positivey skewed as we (Figure 4, Pane B), and credit imits are consideraby iger tan te outstanding baances. Panes C and D in Figure 4 exibit te typica distribution of borrowers reative repayments. A sizabe proportion of te cardoders (more tan 5%), represented by te rigtmost spike in eac grap, repay teir outstanding debt in fu. At te oter extreme, a sma proportion (ess tan 5%) does not repay anyting at a. Tat is represented by te sma eftmost spike in eac grap. Te rest of te consumers pay various amounts in between. Te distribution of partia repayments is markedy positivey skewed and sows cear bounds, or jumps, at te minimum required payments. Repayments tat are equa to te minimum payment are represented by te sigty iger spikes at te corresponding eves (e.g.,.2 for a minimum of 2%,.3 for a minimum of 3%) on te eftand regions of te graps. 5 We aso estimated a mode for te statements wit fixed amount minimum payments; owever, te resuts of suc estimation do not meaningfuy inform us about te effects of varying te fixed amount minimum, and tus we do not report tem ere. Te resuts are avaiabe on request.
10 Consumer Debt Repayment Decisions S69 Tabe 5 STUDY 2 FIELD DATA: SAMPLE SIZE BREAKDOWN AND DESCRIPTIVE STATISTICS Credit Card Provider Minimum Payment Poicy A B C D E F G H I J K Tota N 1% or interest % or % or % or interest % or % or interest % or interest % or % or % or interest % or % or % or % or % or interest Unknown % or Tota N Descriptive Statistics Mean baance ( ) Mean credit imit ( ) Proportion Paying Fu Baance A Predetermined percentage Notes: Providers B, F, and H systematicay vary teir minimum payment poicy across customers. Credit imit data were unavaiabe for Provider E. Te observations abeed as unknown or 5 are cases wit a fixed minimum payment of 5 for wic te officia percentage in te poicy coud not be determined. Note aso tat some of te poicies add te interest to te fixed amount. Figure 4 STUDY 2: DISTRIBUTION OF BALANCES, CREDIT LIMITS, AND REPAYMENTS A: Baances B: Credit Limits Frequency 15, 5, Frequency 15, 5, 1, 3, 5, Baance 5, 1, 2, Credit Limit C: Repayments, A D: Repayments, Predetermined Percentage Percentage 5 3 Percentage Reative Repayment Reative Repayment
11 S7 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE 211 Modeing Approac We mode te distribution of reative repayments as a mixture of tree probabiity distributions: a point distribution representing te probabiity of a fu repayment, a point distribution representing te probabiity of a minimum repayment, and a beta distribution capturing te ocation and dispersion of partia repayments. As Panes C and D in Figure 4 iustrate, tese component distributions togeter caracterize te overa distribution of repayments. Minimum payment poicies are ikey to ave distinct effects on tese different components of repayment practices, and consequenty an appropriate anaysis of repayment beavior soud take tis into account. Our dependent variabe in te mode, R, is a modified version of te reative repayments (repayment/baance), in wic a te repayments equa to te minimum or ower are set to. Consequenty, R is 1 if a fu repayment of te outstanding debt is made, if te repayment made is at te minimum or beow, and between and 1 if a partia repayment is made. For exampe, R = 2 means tat a partia repayment representing 2% of te outstanding baance was made. We mode R as a mixture of tree different distributions: (1) a point mass at R =, wic we ca te minimum repayment component (MRC) and wic captures te probabiity of making a minimum repayment; (2) a point mass at R = 1, wic we ca te fu repayment component (FRC) and wic captures te probabiity of making a fu repayment; and (3) a continuous beta distribution of partia repayments, wic we ca te partia repayment component and wic captures te ocation (LOC) and dispersion (DISP) of te partia repayments. Te specification for eac component of te repayment mode appears in Appendix B. Te expanatory variabes incuded in te mode are credit card baance, reative minimum (i.e., minimum payment/baance), credit imit, te interactions between tese variabes, and a set of 19 dummy variabes to contro for possibe effects of te different monts in te sampe. 6 Providerspecific dummy variabes do not appear in te mode because, as we expained previousy, in our data set te differences in minimum payment eves come argey from te differences between te providers (see Tabe 5). For te sake of brevity, we report ony te resuts for te main variabes and teir interactions ere. 7 We standardize a te independent variabes, subtracting te mean and dividing by te standard deviation in te sampe to wic te mode is appied, to make te resuts more meaningfu wen te interaction terms are incuded. We estimated te mode by maximum ikeiood wit statistica software R (R Deveopment Core Team 27). (Te code used is avaiabe on request.) Resuts: SingePoicy Providers Overa, for singepoicy providers, te resuts suggest a mosty positive association between minimum payment eves and actua reaword repayment practices, wic is broady consistent wit Study 1b. Higer minimum 6 We custer te ast two monts togeter because of te reduced number of observations in te fina mont. 7 A more detaied description of te resuts is avaiabe on request. payments were significanty associated wit consideraby iger proportions of fu repayments of te outstanding debt, iger (and ess dispersed) partia repayments, and moderatey ower proportions of repayments at te minimum or beow. Tese effects were moderated by te eve of baance and credit imit, but tey remained positive for te vast majority of cardoders. Effects of increasing minimum payment eve. Tabe 6 summarizes te mode estimation resuts for singepoicy providers and dispays te estimated coefficients for eac of te four different aspects captured by te mode: te fu repayment component (FRC), te minimum repayment component (MRC), and te ocation (LOC) and dispersion (DISP) of te beta distribution of partia repayments. Te resuts indicate a significant, positive main effect of minimum payment eve on te proportion of fu repayments (b = 12, p < 1); 8 a significant, positive main effect on te ocation (or size) of partia repayments (b = 59, p < 1); and a smaer but aso significant, negative effect on teir dispersion (b = 16, p < 1). We aso found a significant, positive main effect on te proportion of repayments at te minimum or beow (b = 38, p < 1). Note, owever, tat te resuts for te minimum repayment component soud not be directy interpreted from te estimated coefficients in Tabe 6, because tese refer to te conditiona probabiity (not te unconditiona or absoute probabiity) of making a minimum repayment (for te mode specification, see Appendix B). Panes A C in Figure 5 iustrate te actua effect on te proportion of minimum repayments. Te argest effect of te minimum payment eve is tat on te proportion of fu repayments. In addition, te resuts in Tabe 6 sow a series of significant interactions between minimum payments and te oter predictor variabes. To furter iustrate tese findings, we use te estimated mode to predict te effects of different minimum payment eves in any possibe scenario. Figure 5 iustrates te predicted effects of an increase in minimum payments from 2% to 3% and 5% (cosen because essentiay no provider as a 4% minimum percentage), assuming a baance and a credit imit tat are at te median ( 761 and 5,7, respectivey). In ine wit te resuts from Tabe 6, tere is a strong positive effect of minimum payment on te proportion of fu repayments (22% overa; Figure 5, Pane C). Partia repayments sift to iger eves, and teir dispersion decreases, as te minimum payment increases (Figure 5, Pane B). Note aso tat te distribution of partia repayments incudes fewer repayment decisions as te eve of te minimum increases because of te increase in te proportion of fu repayments. Finay, Figure 5 reveas tat te absoute effect of te increase in minimum payments on te proportion of repayments at te minimum or beow is sma and negative (3% overa; Figure 5, Pane A). We aso iustrate te overa positive effect of minimum eve on repayments in te pot of mean reative repayments in Figure 5, Pane D. Tis igigts te broady consistent resuts between tese findings and tose in Study 1b. 8 For ease of exposition, we use te term minimum payment to refer to te mode variabe reative minimum in our discussion of te resuts.
12 Consumer Debt Repayment Decisions S71 Tabe 6 STUDY 2: MODEL ESTIMATES FOR SINGLEPOLICY PROVIDERS Minimum Repayment Component (MRC) Fu Repayment Component (FRC) Mode Variabe Coefficient SE pvaue Coefficient SE pvaue Baance (B) Reative minimum (RM) Credit imit (CL) B RM B CL RM CL B RM CL Intercept Location (LOC) Dispersion (DISP) Mode Variabe Coefficient SE pvaue Coefficient SE pvaue Baance (B) Reative minimum (RM) Credit imit (CL) B RM B CL RM CL B RM CL Intercept Notes: Te overa ogikeiood of te estimated mode is 288,993. Bodface indicates statistica significance at te 1% eve. Figure 5 STUDY 2: PREDICTED EFFECTS OF INCREASING MINIMUM PAYMENTS, SINGLEPOLICY PROVIDERS A: Minimum Repayments B: Part Repayments Distribution C: Fu Repayments D: Mean Repayments Proportion of Statements (%) Frequency 2% 3% 5% Proportion of Statements (%) Mean Reative Repayment Minimum Payment (%) Size of Partia Repayment (%) Minimum Payments (%). Minimum Payments (%) Notes: Predictions assume te median baance ( 761) and median credit imit ( 5,7).
13 S72 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE 211 Figure 6 STUDY 2: PREDICTED PROPORTIONS OF FULL REPAYMENTS BY BALANCE AND CREDIT LIMIT A: SingePoicy, CL = 2,85 B: SingePoicy, CL = 5,7 C: SingePoicy, CL = 8,55 Proportion Fu Repayments Proportion Fu Repayments Proportion Fu Repayments Percent Minimum Percent Minimum Percent Minimum D: PoicyVarying, CL = 2,85 E: PoicyVarying, CL = 5,7 F: PoicyVarying, CL = 8,55 Proportion Fu Repayments Baance Leves: 2 (.) 5 8 1,1 1,4 1,7 2, 2,3 (.) Proportion Fu Repayments Proportion Fu Repayments Percent Minimum Percent Minimum Percent Minimum Notes: Te credit imits (CL) iustrated ere represent oneaf of te median credit imit ( 2,85), te median credit imit ( 5,7), and te median pus oneaf of te median ( 8,85). Te baances go from 2 to 2,3, wic encompasses 89% of a te statements. Moderating effects of baance and credit imit. Figure 6 iustrates te roe of baance and credit imit in moderating te effect of minimum payments on fu repayments and sows predicted effects of an increase in minimum payments on te proportion of fu repayments at different eves of baance and credit imit (Panes A C). Eac pane pots a different eve of credit imit, and eac ine represents a different eve of baance. In ine wit te coefficients in Tabe 6, te infuence of increasing minimum payments on fu repayments is mosty positive. Tis effect is quaified by te eve of baance and credit imit, so tat it becomes moderatey negative for statements wit ow credit imits and ig baances but positive for te vast majority of statements. Toug not iustrated ere, baance and credit imit aso moderate te effect of minimum payments on partia repayments and minimum repayments. Resuts: PoicyVarying Providers Overa, for poicyvarying providers, our estimation resuts indicate a strong negative reationsip between minimum payment eve and repayment among tese providers. Tis reationsip is directionay opposite to te effects we found for singepoicy providers, suggesting tat tese companies may be segmenting consumers by cassifying more risky customers into poicies wit iger minimum payment eves. We found a significant and strong negative main effect of minimum eve on te proportion of fu repayments (b = 1 65, p < 1; see Tabe 7); a significant, negative main effect on te ocation of partia repayments (b = 83, p < 1); a negative effect on teir dispersion (b = 122, p < 1); and a significant and strong positive main effect on te proportion of repayments at te minimum or beow (b = 46, p < 1). A tese patterns are confirmed in te predictions at te median baance and median credit imit dispayed in Figure 7. Te predicted effects of increasing minimum payments on fu repayments (Pane C) and on minimum repayments (Pane A) are quite extreme. Panes D F in Figure 6 aso reaffirm tese resuts, sowing a genera and strong negative effect on te proportion of fu repayments, for any eve of baance and credit imit.
14 Consumer Debt Repayment Decisions S73 Tabe 7 STUDY 2: MODEL ESTIMATES FOR POLICYVARYING PROVIDERS Minimum Repayment Component (MRC) Fu Repayment Component (FRC) Mode Variabe Coefficient SE pvaue Coefficient SE pvaue Baance (B) Reative minimum (RM) Credit imit (CL) B RM B CL RM CL B RM CL Intercept Location (LOC) Dispersion (DISP) Mode Variabe Coefficient SE pvaue Coefficient SE pvaue Baance (B) Reative minimum (RM) Credit imit (CL) B RM B CL RM CL B RM CL Intercept Notes: Te overa ogikeiood of te estimated mode is 34,418. Bodface indicates statistica significance at te 1% eve. Tese resuts for poicyvarying providers are consistent wit segmentation in wic more risky customers are assigned iger minimum payment eves. Tis confirms te account of tese providers discussed previousy and aso reaffirms te significance of te resuts obtained for te singepoicy providers. Specificay, wen te reationsip between minimum payment eves and repayments is predetermined by consumer segmentation, te reationsip is negative, wit iger minimum payment eves associated wit ower proportions of fu repayments, ower partia repayments, and iger proportions of minimum repayments. Tese findings are te opposite of wat we found in te main anaysis wit te singepoicy providers. Potentia Fied Data Limitations One important potentia concern wit our fied data resuts is tat te effects of minimum payments obtained migt be confounded wit te effects of te interest rates consumers face. For exampe, it is pausibe tat setting iger minimum payments is associated wit aso setting iger interest rates, and if tat is te case, te observed effects of iger minimum payments coud just be effects of iger interest rates. As expained subsequenty, we can rue out suc an account. We soud carify tat we ave access ony to partia interest data te tota interest carges incurred eac mont not te officia interest rate poicies set by providers. Consequenty, we do not know te interest rates for a arge proportion of statements tat did not incur interest carges. In addition, we find tat inferring annua interest rates from te tota interest carges is unreiabe because tese amounts can incude different carges unreated to appying a fixed interest rate to te unpaid debt in te previous mont. For tese reasons, we do not incude interest rates in our main anayses. Despite tese imitations, we can construct monty interest rates for a subset of te statements from te information we ave and anayze ow tey correate wit minimum payment eves. Tis exercise produces cear resuts. A ig positive correation exists between interest rates and minimum payments eves among te poicyvarying providers ( = 46, p < 1), but tat correation disappears among te singepoicy providers ( = 2, p < 1). Tis resut is in ine wit our findings and argey rues out confounding effects of interest rates. It aso sows tat te poicyvarying providers, wic segment consumers and give more risky customers iger minimum payments, aso tend to give tem iger interest rates. Wit tese providers, owever, iger minimum payments are associated wit ower repayments (see Figure 7), presumaby because te effect of te segmentation exceeds any oter effects of minimum payments or interest rates. In contrast, wit singepoicy providers, tere is no association between a iger minimum payment and a iger interest rate, so tere is no room for distorting effects of interest rates. Finay, as wit a uncontroed reaword data, oter reevant seection effects not contempated in te modes may exist. For exampe, it migt be tat providers wit different minimum payment eves aso ave oter caracteristics (unknown to us) tat ead to different types of consumers sefseecting into or differentiay quaifying for credit card companies wit different minimum payment poicies. Anoter aspect tat we coud not account for wit our data is tat some consumers ave a debt portfoio, wic can incude, for exampe, spending on more tan one credit card. Understanding ow consumers dea wit te debt in different components of teir portfoios migt sed new igt on te roe of minimum payment eves in repayment decisions. We considered as many aspects of repayments as te data aowed, and tese issues remain as important questions for furter researc.
15 S74 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE 211 Figure 7 STUDY 2: PREDICTED EFFECTS OF INCREASING MINIMUM PAYMENTS, POLICYVARYING PROVIDERS A: Miniinum Repayments B: Part Repayments Distribution C: Fu Repayments D: Mean Repayments Proportion of Statements (%) Frequency 5% 3% 2% Proportion of Statements (%) Mean Reative Repayment Minimum Payment (%) Size of Partia Repayment (%) Minimum Payment (%). Minimum Payment (%) Notes: Predictions assume te median baance ( 761) and median credit imit ( 5,7). Resuts Summary Te resuts of Study 2 sow tat tere is a mosty positive association between minimum payment eves and actua reaword repayment practices, wic is broady consistent wit our findings in Study 1. Our main resuts, for singepoicy providers, sow tat iger minimum payments are significanty associated wit consideraby iger proportions of fu repayments of te outstanding debt, iger (and ess dispersed) partia repayments, and moderatey ower proportions of repayments at te minimum or beow. Tese effects are moderated by te eve of baance and credit imit, but tey remain positive for te vast majority of cardoders. Te moderating effects we uncovered ere and in Study 1 (for propensity to repay te minimum) igigt te need for enders to consider consumer eterogeneity wen setting minimum payment poices. Our estimation resuts for poicyvarying providers (B, F, and H) suggest tat tese companies are segmenting consumers by cassifying more risky customers into poicies wit iger minimum payment eves. Tis creates a strong negative reationsip between minimum payment eve and repayment among tese providers: a negative effect on ikeiood to pay in fu, a negative effect on ocation and dispersion of partia repayments, and a positive effect on ikeiood to pay te minimum. Tese findings ceary refect te nature of te segmentation undertaken by credit card companies and reaffirm te significance of te resuts obtained among te singepoicy providers. DISCUSSION AND CONCLUSION We examined te effects of varying te eve of minimum required payment and discosing suppementa oan information on debt repayment decisions. Our findings ave impications for pubic poicy, consumers, and financia services firms. Our experiments wit U.S. consumers confirm tat incuding minimum payment information in credit card bis as a strong negative effect on repayment beavior (see aso Stewart 29). Given tis effect, our studies sed igt on te question weter increasing te percentage of te outstanding baance required to be paid eac mont woud increase repayments. Our fied study suggests tat suc a cange woud ave mosty positive effects on consumers repayment practices, and tese effects are moderated by te eve of baance and credit imit. Our experimenta resuts aso sow tat borrowers propensity to repay te minimum moderates te effect of increasing te minimum required eve. More important, our experiments suggest tat increasing te minimum payment eve is unikey to offset te strong negative effect of presenting minimum required payment information. Tis aspect is difficut to judge from te fied data. To te best of our
16 Consumer Debt Repayment Decisions knowedge, no credit card providers offer credit cards witout minimum payments or do not incude minimum payment information in teir bis. Consequenty, te effect of not incuding minimum payments in rea credit card bis is an empirica question yet to be answered. Assuming tat te presence of minimum payments in credit card debt is a given, our findings suggest tat increasing teir eve coud reduce tis debt for consumers and ep acieve iger repayments (wit te caveats expained previousy). As we indicated at te beginning of te artice, suc a measure is in ine wit te cange from 2% to 5% in minimum payments carried out by Case Bank in August 29, as we as te (rejected) proposa for a mandatory increase in minimum payments to 5% presented to te Britis Pariament by te Department for Business, Innovation and Skis (29). Tis ast measure assumes tat consumers woud benefit from suc an increase, mainy in te sense tat cardoders wo opt to repay te minimum woud be better protected against te risks of increasing debt because tey woud presumaby repay a arger portion of teir debt eac mont. Our anaysis aso suggests tat increasing minimum payments coud benefit te majority of te arger group of customers wo opt to repay teir debt in fu, toug tis migt negativey affect te minority. From te perspective of financia services firms, te moderating effects of te eve of baance and credit imit in te fied study and of te propensity to repay te minimum in te experimenta resuts suggest tat a segmentation approac tat accounts for tese individua differences coud be wort exporing wen setting minimum payment eves. Te second category of potentia interventions tat we examined invoved discosing suppementa information about te time to pay off te oan if ony te minimum is repaid, te future interest cost incurred, and te monty repayment required to pay off te oan in tree years. Overa, discosing suc suppementa information did not significanty mitigate te negative effects of presenting minimum payment information. Moreover, we found tat discosing future interest cost information significanty increased te ikeiood of paying ony te minimum required, toug tis effect was attenuated wen information about te time to pay off te baance aso appeared. Tese tree types of information (time to pay off te oan, future interest cost, and repayment needed to pay off te baance in tree years) are exacty wat te recenty enacted CARD Act requires enders to incude in teir bis. Our researc suggests tat reying on tis information discosure aone is not ikey to offset te negative effects of incuding minimum payment information in te bis and probaby wi not increase debtors monty repayments to te eves expected. Additiona forms of intervention, suc as credit counseing services or financia iteracy education, may be required to improve repayment practices. Recent researc on savings growt (McKenzie and Liersc 211) sows tat interventions at te time of te repayment decision tat igigt te exponentia growt of debt due to compound interest migt be effective. We are not impying tat ower debt eves are aways better for a te agents invoved in financia transactions. Te functioning of te financia system is a compex issue tat invoves parties wit fundamentay conficting interests S75 and goas. From one perspective, statistics sow tat some U.S. consumers are carrying uneaty eves of debt, and measures tat nudge tem into eatier repayment practices coud be beneficia. Recent industry statistics report average outstanding credit card debt for ouseods wit credit cards as a ig as $1,679, wit approximatey 13.9% of consumers disposabe income going to service credit card debt in te fourt quarter of 28 (Nison Report 29; U.S. Congress Joint Economic Committee 29, cited in Wicox, Bock, and Eisenstein 211). Aternativey, tere are situations in wic consumer debt may actuay be beneficia or necessary (to make ends meet). In addition, te financia firms tat set te minimum payment poicies ave as a primary objective to increase teir profits, wic under te rigt conditions can ep te financia system as a woe. Poicy makers and reguators soud ideay aim to maximize overa consumer wefare, wic invoves making compex decisions about wic agents to favor or protect. Rater tan prescribing specific poicy interventions, our findings provide reevant insigts into te credit card debt repayment process tat can be usefu for poicy makers, financia institutions, consumers, and researcers. Our resuts suggest tat neiter incuding minimum payment information in credit card bis nor discosing additiona information (e.g., as mandated by te CARD Act) works as intended, and terefore we advocate a cinica trias approac to reguation in wic furter canges are tested experimentay before a broader introduction. A recent memorandum from te U.S. Office of Management and Budget (Sunstein 21) aso advocates suc an approac. Great potentia exists for furter researc in tis area. A fruitfu next step woud be to conduct additiona experiments to furter examine te effects of te types of information mandated by te CARD Act and compare tem wit aternative approaces, suc as more toroug financia education. As part of tis approac, it woud aso be usefu to eicit consumers beiefs about te consequences of credit and anayze weter tese beiefs cange after consumers receive different types of information. Furter researc coud aso examine te effects of ancors tat are iger tan te typica minimum payments consumers face for exampe, different eves of repayment recommendations. It woud aso be wortwie to examine furter actua credit card repayment beavior using enders monty credit card statement transaction data (simiar to our U.K. fied data) to compare, for exampe, repayment beavior before and after te CARD Act reguations went into effect in 21. Furter researc addressing tese important issues is critica for bot consumers and financia service providers webeing. APPENDIX A: MEASUREMENT SCALES (STUDY 1) CFC (Stratman et a. 1994) 1 = extremey uncaracteristic, and 7 = extremey caracteristic. Items 3, 4, 5, 9, 1, 11, and 12 are reverse scored ( ). 1. I consider ow tings migt be in te future, and try to infuence tose tings wit my day to day beavior. 2. Often I engage in a particuar beavior in order to acieve outcomes tat may not resut for many years.
17 S76 JOURNAL OF MARKETING RESEARCH, SPECIAL ISSUE ( ) I ony act to satisfy immediate concerns, figuring te future wi take care of itsef. 4. ( ) My beavior is ony infuenced by te immediate outcomes of my actions (tat is, outcomes occurring in a matter of days or weeks). 5. ( ) My convenience is a big factor in te decisions I make or te actions I take. 6. I am wiing to sacrifice my immediate appiness or webeing in order to acieve future outcomes. 7. I tink it is important to take warnings about negative outcomes seriousy even if te negative outcome wi not occur for many years. 8. I tink it is more important to perform a beavior wit important distant consequences tan a beavior wit essimportant immediate consequences. 9. ( ) I generay ignore warnings about possibe future probems because I tink te probems wi be resoved before tey reac crisis eve. 1. ( ) I tink tat sacrificing now is usuay unnecessary since future outcomes can be deat wit at a ater time. 11. ( ) I ony act to satisfy immediate concerns, figuring tat I wi take care of future probems tat may occur at a ater date. 12. ( ) Since my day to day work as specific outcomes, it is more important to me tan beavior tat as distant outcomes. Knowedge of Interest Compounding Knowedge score is cacuated by aocating 1 point for eac correct answer (underined); score range is Do you beieve te foowing statement is true or fase? A oan wit a 3% monty interest carge is a better dea tan a oan wit a 2% annua interest carge. {True; Fase; Not sure} 2. Wic of te foowing do you tink woud be wort more in two years? {$1 received today, and ten put in a savings account at an interest rate of 1%, compounded annuay; $12 received two years from today; Tey woud be wort te same amount; I m not sure wic woud be wort more.} 3. If you borrowed $1 today at an APR of 12%, approximatey ow muc interest woud you owe at te end of 1 mont? {$2.; $12.; $1.; $4.; I m not sure.} APPENDIX B: MODEL SPECIFICATION (STUDY 2) Te minimum and fu repayment components (MRC and FRC) of te mode simpy assume, respectivey, tat repayments are at R = (te minimum or ower) or at R = 1 (fu repayment). Te probabiity of a fu repayment, p FR, is given by ( ) pfr (A1) og = X 1 p FRC FRC FR were X FRC is te matrix of independent variabes and FRC is te vector of coefficients. To ensure a webeaved ikeiood function, we estimate te probabiity of a minimum repayment conditiona on te cardoder repaying ess tan te fu baance, as obtained from ( ) pmr R<1 (A2) og = X 1 p MRC MRC MR R<1 Te unconditiona probabiity of a minimum repayment is given by p MR = p MR R<1 1 p FR. Te partia repayment component is based on Smitson and Verkuien s (26) beta regression mode. Te beta distribution is caracterized by two parameters, a and b. We reparameterize it using a = and b =, were represents ocation, represents precision, and variance, 2 = 1 / + 1, decreases wit. We specify two submodes, one for ocation (LOC) and one for dispersion (DISP). Te ocation submode can be expressed as foows: ( ) (A3) og = X 1 LOC LOC (A4) Te dispersion submode is specified as foows: og = X DISP DISP Te negative sign ere makes DISP interpretabe as dispersion rater tan precision. Finay, te probabiity density for te beta distribution is scaed by te probabiity of a partia repayment (1 p FR p MR ), so tat probabiity sums to 1 over te different components of te mode. 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