Working Paper: NBER ID: w22742
Authors: Benjamin J. Keys; Jialan Wang
Abstract: Using a dataset covering one quarter of the U.S. general-purpose credit card market, we document that 29% of accounts regularly make payments at or near the minimum payment. We exploit changes in issuers' minimum payment formulas to distinguish between liquidity constraints and anchoring as explanations for the prevalence of near-minimum payments. Nine to twenty percent of all accounts respond more to the formula changes than expected based on liquidity constraints alone, representing a lower bound on the role of anchoring. Disclosures implemented by the CARD Act, an example of one potential policy solution to anchoring, resulted in fewer than 1% of accounts adopting an alternative suggested payment. Based on back-of-envelope calculations, the disclosures led to $62 million in interest savings per year, but would have saved over $2 billion per year if all anchoring consumers had adopted the new suggested payment. Our results show that anchoring to a salient contractual term has a significant impact on household debt.
Keywords: No keywords provided
JEL Codes: D14; G02; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| minimum payment formula changes (G51) | consumer payment behavior (D19) |
| liquidity-constrained borrowers (G51) | bunching at new minimum (C69) |
| liquidity-constrained borrowers (G51) | delinquency (K42) |
| anchoring behavior (G41) | consistent payments near minimum (D41) |
| formula adjustments (C51) | changes in payment behavior (D19) |
| mandated disclosures (G18) | limited adoption of suggested payments (J33) |