Consumers’ credit card repayment decisions: The role of higher anchors and future repayment concern

McHugh, Sandie; Ranyard, Rob

doi:10.1016/j.joep.2015.12.003

Cited by 29 publications

(22 citation statements)

References 18 publications

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“…Even though having a credit card enables consumers to have more cash to spend for other purposes, they can end up paying more on their loan due to a high interest rate. Empirical evidence confirms that credit card holders do not repay their debt in an optimal way (Gathergood, Mahoney, Stewart, & Weber, 2019; Haliassos & Reiter, 2005; McHugh & Ranyard, 2016; Toraman, Kılıç, & Buğan, 2016) and are prone to over‐indebtedness (Bannier & Gärtner, 2019; Barboza, 2018; Canner & Elliehausen, 2013). In addition, studies also show that credit card use is linked to overspending and impulsive spending (Badgaiyan & Verma, 2015; Gathergood, 2012; Roberts & Jones, 2001; Sotiropoulos & D’Astous, 2012).…”

Section: Introductionmentioning

confidence: 99%

Financial literacy, money management skill and credit card repayments

Hamid

Loke

2020

Int J Consumer Studies

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This paper studies the relationship between socio‐economic factors, financial literacy, money management skill, overspending and impulsiveness on credit card repayment decisions. Analysis based on a sample of 451 credit card users in Malaysia showed that socio‐economic factors related to education, income, ethnicity, marital status and number of credit cards held influence credit card repayment decisions. Financial literacy and money management skill have a positive effect on credit cardholders’ decision making. Specifically, money management skill related to financial statements monitoring, prompt bill payment, spending within budget and handling money matters well influence credit card repayments. However, personality traits such as overspending and impulsiveness do not exert a significant effect on credit card payment behaviour. The findings of this study support the argument that financial education and behavioural intervention that inculcate good money management skill are important in shaping individuals’ behaviour.

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Section: Introductionmentioning

confidence: 99%

Financial literacy, money management skill and credit card repayments

Hamid

Loke

2020

Int J Consumer Studies

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“…Therefore it is foreseeable that the Baseline Plus Advice treatment may have a positive effect on repayments compared to the Baseline. In an experimental setting, providing participants with an 'anchor' repayment rate on credit card debt tends to reduce repayments if the anchor is lower than participants would otherwise have repaid and increase repayments if the anchor is higher (Hershfield and Roese, 2015;McHugh and Ranyard, 2016). Given that the anchors in the Anchoring condition in this experiment are all higher than the minimum, the effect of the anchor should be an increase in repayments for those who repay the minimum.…”

Section: Hypothesesmentioning

confidence: 88%

Prize Linked Debt: Increasing Credit Card Repayments in an Online Experiment

2020

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Growing credit card debt can be a source of substantial financial difficulty for some borrowers and their families. For many, the growth of credit card debt may stem from the choice to make only the lowest possible repayment that satisfies their credit agreement each month: the minimum repayment. One reason borrowers may pay the minimum amount is that they simply do not have the ability to repay more. However, borrowers may also be motivated by behavioural factors such as acting overoptimistically, 'anchoring' on the minimum repayment or not fully understanding the implications for future debt accumulation when paying the minimum. This paper investigates the capacity of a financial tool called Prize Linked Debt (PLD) to increase debt repayments amongst those who make the minimum repayment but are not constrained to doing so, using an online experiment with 858 participants. PLD entails a prize threshold set above the credit card minimum repayment threshold. A borrower can become eligible to win a prize with lottery-like odds by repaying on or above the prize threshold. PLD is tested in this paper by offering participants in an online experiment a series of financially incentivized decisions. All participants make a set of three decisions which are the same between participants. In a second set of decisions otherwise identical to the first, some participants are offered the PLD and some are not. A prize threshold set on average 37% above the minimum increases repayments by 31% for those offered PLD compared to those who are not, amongst participants who repaid the minimum before being offered PLD. The probability of repaying the minimum falls by 69.1% for this population. Examining the PLD further, three aspects make up the effect: financial advice to pay more than the minimum, the suggestion of a specific amount to repay ('anchoring') and the 'skewness' of the financial incentive (e.g. the difference between a 5% chance of winning $400 compared to a 50% chance of winning $40 compared to a guaranteed $20). All of these characteristics are tested in the experiment by offering some participants a promotion which replicates one of the above aspects of the PLD and comparing repayments between this group and the group of people who were offered the full PLD. The advice effect makes up roughly half of the PLD effect, while anchoring does not contribute much more than this. Evidence for the effects of skewness are inconclusive. Some credit card issuers have explored tools to proactively increase repayments amongst borrowers who have problematic debt. These tools (for example, sending reminders to borrowers when payments are due) aim to help borrowers who pay the minimum not because they cannot pay more, but for behavioural reasons. PLD provides an additional tool that policy-makers or financial institutions can use to increase repayments amongst borrowers who consistently make low repayments. PLD would be preferable to, for example, raising the minimum, as no cost is imposed on those who are unable to increase their repa...

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“…For example, the minimum payment requirements provided to credit card holders on their monthly statements has been shown to function as an anchor biasing payments toward these minimums (e.g. Hershfield and Roese 2015;Navarro-Martinez et al 2011;Stewart 2009), and there is evidence that raising these minimums can increase the rates at which households pay down their credit card debts (McHugh and Ranyard 2016). There is also evidence from field experiments demonstrating that anchoring cues can work in a savings context.…”

Section: Behavioral Economics and Savings Behaviormentioning

confidence: 99%

Encouraging Tax‐Time Savings with a Low‐Touch, Large‐Scale Intervention: Evidence from the Refund to Savings Experiment

Roll¹,

Russell²,

Perantie³

et al. 2018

Journal of Consumer Affairs

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Low‐ and moderate‐income households often struggle to save, but the annual tax refund represents a prime opportunity for these households to save toward their financial goals or build their emergency savings. This paper presents the results of a randomized, controlled experiment embedded in a free tax‐preparation product offered in 2013 to low‐ and moderate‐income households. The experiment involved approximately 470,000 filers and assessed the impact of behavioral interventions on their savings behaviors. The results show that filers exposed to the treatments, which involved the established behavioral‐economics techniques of anchoring, choice architecture, and persuasive messaging, were more likely than a control group to save their tax refund and, on average, saved more of the refund. A follow‐up survey of these tax filers found that the treatments were associated with saving more of the tax refund six months after filing. The findings also show that anchors encouraging filers to deposit certain amounts are more effective than persuasive messaging emphasizing savings.

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Consumers’ credit card repayment decisions: The role of higher anchors and future repayment concern

Cited by 29 publications

References 18 publications

Financial literacy, money management skill and credit card repayments

Financial literacy, money management skill and credit card repayments

Prize Linked Debt: Increasing Credit Card Repayments in an Online Experiment

Encouraging Tax‐Time Savings with a Low‐Touch, Large‐Scale Intervention: Evidence from the Refund to Savings Experiment

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