Lost in Translation: 'Minimum Amount Due' Can Curb Monthly Credit Card Repayment

Minimum payment and other information on monthly bills fails to inspire larger payments among US and UK cardholders

CHESTNUT HILL, MA (11/7/2011) – Credit card customers are likely to pay less toward their credit card debt because their monthly bills display information about the minimum required payment amount, American and British researchers report in the current edition of the Journal of Marketing Research.

For many debt-laden consumers, printing the minimum required payment information on their account statements can reduce the amount they pay each month by as much as 24 percent – about $120 less on a $2,000 balance – according to the researchers, who conducted surveys of more than 500 U.S. consumers and reviewed anonymous data from more than 100,000 British cardholders at 11 different lenders.

“The mere presence of minimum payment information acts like an anchor on borrowers’ repayments, pulling them downward,” said co-author Linda Salisbury, an assistant professor of marketing at Boston College’s Carroll School of Management. “This presents a tricky balancing act for lenders: removing the minimum required payment may increase repayments overall, but it would also put lenders at greater risk of increasing default levels.”

With credit card debt hovering at slightly more than $10,000 for the typical American household and regulations mandating a range of debt and repayment information be included in monthly statements, researchers sought to find out if the data actually motivate consumers to pay down their debt.

Increasing the minimum required payment – typically from 2 percent to 5 percent of the loan balance – actually had a positive effect on repayment for most consumers. However, that alone wasn’t enough to overcome the negative effects of posting the minimum required payment, according to the researchers from Boston College and the University of Warwick, University of Essex and University College London, all in the United Kingdom.

In addition, displaying information like payment scenario timelines and potential long-term interest costs – as is now required on US credit card statements – did not encourage increased payments. Disclosing future interest costs significantly increased the likelihood a cardholder would pay only the minimum required.

Borrowers’ credit limit, balance due and propensity to pay the minimum required payment all factored into the influence of statement data on payment behavior, the team found.

For borrowers who typically pay the minimum each month, increasing the minimum required amount has a positive effect, but this is not the case for borrowers who typically pay more than the minimum required; increasing the minimum had no effect for them.

While the U.S. CARD Act of 2009 mandated many of these new information disclosures, researchers point out that disclosure alone is not likely to increase debtors’ monthly repayments to the levels expected.

The researchers urged “clinical trials” to test the impact of debt information disclosure, noting that the U.S. Office of Management and Budget had drawn the same conclusion in their guiding principles for the use of information disclosures in the regulatory process.

“By testing new regulations more thoroughly before implementing them, regulators can avoid unintended consequences such as those identified in this research,” said co-author Katherine Lemon, the Accenture Professor of Marketing in the Carroll School of Management at Boston College.

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