When a credit card is paid in full, the cardholder does not have to pay interest. Failure to pay in full attracts higher interest. Nevertheless, meeting minimum payments during a period of financial hardship does not necessarily create a serious debt problem for consumers. Yet if a consumer continue to choose lower repayment amounts, they will quickly accumulate higher interest costs, and lower their credit score, leading to higher borrowing costs in the future and increasing the risk of falling into a debt crisis. Further, being under the pressure of debt for a long time increases the psychological and physiological burden for consumers. Figures from the UK credit card market show that about a quarter of cardholders opt for the lowest payment amount. Increasing the repayment amount of cardholders is a concern for financial regulators and for society.
This report examines the impact of increased information disclosure on cardholders' repayment behavior. Some theories suggest that the reason cardholders choose a lower payment amount is a lack of information, that is, they do not understand the cost of choosing a lower payment on their own welfare. If more comprehensive information is disclosed, in this view, it could help cardholders gain a more comprehensive understanding of financial products, reduce information asymmetry faced by cardholders, and help cardholders to make better decisions. This view has been applied in some countries, such as under the United States’ 2009 amendment to the Credit Card Act, which explicitly requires that the minimum repayment month, minimum repayment and the amount of principal and interest paid within 36 months to be disclosed in the credit card bill. Compared with using the "anchor" approach of deleting the lowest repayment (and adopted in the previous two credit card repayment reports, i.e. the Fintech Research Institute's 7th and 23rd issue of 2020), the biggest advantage of the increased information disclosure is that it does not "deprive" the cardholder of the right to choose the repayment amount.
The experimental subjects in this report are cardholders who repay manually. Cardholders who repay manually will check their credit card bills regularly and decide how much to pay based on their credit card bills, making it virtually certain that subjects can read the relevant information. The experimental subjects were randomly divided into three groups. The first group was a control group, and no information was added to the bill. In the second group, time information was added to the bill, and cardholders who paid more each month were able to pay off the debt earlier. Taking 3000 yuan credit card bill as an example, with a loan interest rate 17.48%, the relationship between the repayment amount and the repayment time is shown graphically. If the cardholder pays 332 yuan (160 yuan, 112 yuan) regularly every month, he can pay off the debt within one year (2 years, 3 years). If the consumer chooses the lowest payment, it can take more than 14 years to pay off the debt. The third group is also in the experimental group. In addition to the time information in the second group, cost information is added to the bill. Increasing the monthly repayment amount can reduce the interest cost. Similarly, if the card holder pays off the debt within one year (2 years, 3 years), the interest payment is 274 yuan (568 yuan, 867 yuan), and if the lowest payment is chosen, the interest payment is 3,494 yuan which exceeds the principal of the loan.
After six credit card billing cycles, the researchers found that increased disclosure had no significant effect on reducing the burden on cardholders. There was no significant change in cardholder behavior either in terms of increased repayment time information or increased repayment time information and borrowing cost information. Specifically, there is no significant difference between the control group and the experimental group. Second, there was no significant difference in the cardholder's credit card debt scale, transaction amount and borrowing cost between the control group and the experimental group. Third, there was no significant difference in the proportions of cardholders using the lowest payment, paying in full and forgetting to pay in the control group and the experimental group.
The increased disclosure did not affect cardholder behavior. There are two possible reasons. One is that the cardholder did not read the information, that is, although the information was provided, the cardholder intentionally or unintentionally ignored the information, resulting in the ineffective information. The other is that more information itself has no effect. In other words, the cardholder may not understand the meaning of the information even though he/she sees the information. The information does not help him/her to make better decisions. It is also possible that they understand the message and are unwilling or unable to make behavioral changes.
In short, increasing the repayment time information and cost information does not change the cardholder's behavior, and does not achieve the purpose of reducing the cardholder's burden. Instead, it is an ineffective external intervention and an unsuccessful "nudge", which is far less than the effect of deleting the minimum repayment. This report is a reinterpretation of The FCA report, The conflict between consumer intentions, beliefs and actions to pay down credit card debt.
