Credit Card Disclosures Cause Consumers to Pay Less Toward Debt [Study]

Opening a credit card statement these days often comes with a bit of sticker shock. Banking regulations passed in recent years now require lenders to show consumers how much their credit card balances will generate in interest and fees if only minimum payments are made to pay it off. For example, a healthy monthly payment of $50 going toward a modest $2,500 balance at 9 percent interest will take over 5 years to pay off and add $645 in interest—a whopping 26 percent of the borrowed amount.

Credit card interest rates are now hovering around 29 percent for many U.S. borrowers, who, on average, hold just over $10,000 in credit card debt per household. By any economics definition, one would think that consumers would be rushing to pay double or triple the minimum payment to avoid a mountain of interest and decades of payments.

However, researchers at the Boston College Carroll School of Management found that disclosing the minimum payment amount on credit card statements ultimately results in consumers paying less toward their debt. In the study, a required minimum payment caused consumers to reduce their debt payments by 24 percent.

Surprisingly, card statements showing the interest accrual and payoff time did not motivate consumers to pay more. Instead, they made it more likely that consumers would only pay the minimum amount due. Even when lenders raised the minimum payment by as much as 5 percent of the card balance, it could not compensate for the overall reduction in debt payments resulting from simply disclosing the information in the first place.

The explanation for this phenomenon is likely very simple. With a lack of disclosure, consumers may be unsure as to what they should pay. So, they overcompensate, trying to avoid getting hit with big late fees or higher interest charges. Disclosure removes the uncertainty, allowing consumers to pay less on their debt while still avoiding big penalties. Consumers can then divert the “savings” toward other bills or living expenses—not surprising at a time when many American families are strapped for cash.

This, of course, presents a dilemma for lenders: disclose minimum payment information and receive less in payments, or remove disclosure and risk some consumers defaulting on their debt because they don't know how much to pay. It also presents a problem for regulators who want to protect consumers from predatory lending practices while encouraging them to pay off their debt faster.

In either case, researchers say the study is useful for testing the effects of information disclosure. They say studies like this one can be used to test new regulations before they are implemented and help regulators avoid “unintended consequences.”

The study, appearing in the Journal of Marketing Research, is based on surveys of 500 U.S. consumers and data on over 100,000 British cardholders and 11 lenders. The study was published by authors Kay Lemon, Linda Salisbury and others.