Consumer Debt Habits Barely Budge Despite CARD Act's Nudge

Much has been made — both good and bad — about nudges. This is the concept that consumer behavior can be influenced by providing default choices that will lead to better outcomes.

Some argue that it is common sense to use nudges; others see them as smug paternalism. What supporters and critics alike often take for granted is the idea that nudges — for example, opting employees into a 401(k) plan in an effort to get them to save for retirement — do have a big impact on people's behavior.

But in the U.S. credit card market, evidence is mounting that government-mandated nudges are not working as well as their backers hoped.

A new study from researchers at the University of Pennsylvania and the University of Illinois looks at the impact of certain credit card disclosures that were required by Congress in 2010. Under the Credit Card Accountability, Responsibility and Disclosure Act, card issuers have to inform many of their customers about how much they would need to pay to wipe out their existing balance in three years.

The idea behind the new disclosures, which show up on credit card statements, is that the long-standing minimum payment box leads some borrowers to pay less than they can afford each month.

Consider a credit card bill that lists a $40 minimum payment. The borrower might pay $40 exactly, or they might pay $50, based on the rule of thumb that they will pay the minimum plus $10. Either way, the $40 minimum payment is serving as an anchor in their thinking.

"You might use that minimum as kind of a benchmark, or a mental cue," said Benjamin Keys, a professor at Penn's Wharton School and a co-author of the recently published study.

The 2010 disclosure requirement was supposed to provide a new anchor, one that would persuade consumers to make bigger monthly payments, which over time would lead to lower total debt obligations. But the effect so far has been negligible, the researchers found, relying on data collected by the Consumer Financial Protection Bureau.

Even after the disclosure requirements took effect, the vast majority of credit card users either paid off their entire balance each month, or they paid an amount close to the required minimum. Only 16% of all monthly payments were for amounts between 10% and 99% of the outstanding balance.

The researchers estimated that U.S. consumers saved a total of $62 million in interest each year as a result of the new disclosure requirements — out of total potential annual savings of more than $2 billion. Much was left on the table despite the fact that a significant portion of borrowers who make only the minimum payment have enough cash available to pay more.

"In sum, the effects of the CARD Act disclosures were modest," the researchers concluded.

The paper puts forth a few potential explanations for why the impact has been so small. For example, the researchers note that many credit card users never look at their monthly statements, particularly in the age of online and mobile payments.

They also hypothesize that the minimum payment may be exerting a stronger influence than the three-year payoff option. If that's the case, the private sector's nudges are working much better than the nudges designed by Congress.

The latest research follows a 2013 study that also cast doubt on the effectiveness of the CARD Act's disclosure requirements. That paper calculated that after the law took effect, the percentage of borrowers on track to pay off their balance in 36 months rose by a mere half a percentage point.

The disclosure requirements are only one part of the 2010 law, and consumer advocates say that some of the legislation's other provisions, such as its restrictions on interest rate hikes on existing debt, have been a clear boon for consumers.