Minimum Payments Alter Debt Repayment Strategies Across Multiple Cards

Abstract

U.S. households currently hold $770 billion in credit card debt, often managing repayments across multiple accounts. The authors investigate how minimum payment requirements (i.e., the requirement to allocate at least some money to each account with a balance) alter consumers’ allocation strategies across multiple accounts. Across four experiments, they find that minimum payment requirements cause consumers to increase dispersion (i.e., spread their repayments more evenly) across accounts. The authors term this change in strategy “the dispersion effect of minimum payments” and provide evidence that it can be costly for consumers. They find that the effect is partially driven by the tendency for consumers to interpret minimum payment requirements as recommendations to pay more than the minimum amount. While the presence of the minimum payment requirement is unlikely to change, the authors propose that marketers and policy makers can influence the effects of minimum payments on dispersion by altering the way that information is displayed to consumers. Specifically, they investigate five distinct information displays and find that choice of display can either exaggerate or minimize dispersion and corresponding costs. They discuss implications for consumers, policy makers, and firms, with a particular focus on ways to improve consumer financial well-being.