Credit Card Repayment Research Articles

Credit card repayments in a Latin American country: a psychological perspective

PropósitoAnalizamos la decisión de la tasa de pago de los estados de cuenta de tarjetas de crédito a través del uso de factores de fondo y percepciones que indirectamente inciden en las creencias de acuerdo a la teoría del comportamiento planeado.Diseño/metodología/enfoqueDebido a que los marcos legales e institucionales, así como también las encuestas financieras de hogares son heterogéneas entre países, se utilizan datos de los hogares de la economía chilena como un punto de partida en esta materia.HallazgosLa probabilidad de que un individuo elija pagar un monto menor que el total de facturación de sus tarjetas de crédito es afectada por variables proxy asociadas al control conductual percibido. La condición de ser jefe de hogar, ser más joven, la percepción de una alta o excesiva carga financiera de la deuda, y enfrentar situaciones desfavorables e inesperadas que desvían del presupuesto, entre otras, son relevantes para las decisiones de pago.OriginalidadLa novedad de este artículo es que su enfoque difiere del enfoque tradicional de la racionalidad económica en relación a las tarjetas de crédito. Los resultados son relevantes para los hacedores de política y reguladores financieros debido a sus implicancias para las finanzas conductuales de los hogares y sus medios de pago.

The COVID-19 shock and consumer credit: Evidence from credit card data

We study the dynamic effect of the COVID-19 shock on credit card use in 2020. Local case incidence had a strong negative effect on credit card spending in the early months of the pandemic, which diminished over time. This time-varying pattern was driven by the fear of the virus, rather than government support programs, consistent with the “pandemic fatigue” of consumers. Local pandemic severity also had a strong effect on credit card repayments. These spending and repayment effects offset each other, resulting in no effect on credit card borrowing, consistent with credit-smoothing behavior. The local stringency of nonpharmaceutical interventions also had a negative effect on spending and repayments, albeit smaller in magnitude. We conclude that the pandemic itself was a more important driver of changes in credit card use than the public health policy response.

Exploring The Role of Information Disclosure in Influencing Credit Card User’s Repayment Decisions among Malaysians

Bound rationality theory is used to study the role of information disclosure in influencing credit card user’s repayment behaviour in Malaysian. Eight types of information disclosure analysed on the actual credit card users which divided into three prior define groups. Data collected by using the survey response of 413 card users in the northern region of West Malaysia. The finding of the discriminant analysis confirms that minimum payment due is the most contributing information disclosure which discriminant amongst the groups. Conditional on attributes of the data, quadratic discriminant analysis (QDA) outclassed the other discriminant analysis. QDA-resubstitution enable the credit card users to correctly classified repayment behaviour at 85 percent. Addition to that, for prediction purposes, 84 per cent of credit card users were correctly classified. The findings of this study highlight the importance of information disclosure in influencing credit card repayment decision. These findings have implications for policy maker, card users and issuers.

Indonesian Islamic moral incentives in credit card debt repayment: a feature selection using various data mining

PurposeDespite the practice of credit card services by Islamic financial institutions (IFIs) is debatable, Islamic banks (IBs) have been offering this product. Both Muslim and non-Muslim customers have subscribed to the products. Thus, it is critical to analyse the strategy of IBs’ moral messages in reminding their Muslim and non-Muslim customers to repay their credit card debts. This paper aims to investigate this issue in Indonesia using data mining via machine learning.Design/methodology/approachThis study examines the IBs’ customers across the 32 provinces of Indonesia regarding their moral status in credit card debt repayment. This work considers 6,979 observations of the variables that affect the moral status of the IBs’ customers in repaying their debt. The five types of data mining via machine learning (i.e. Boruta, logistic regression, Bayesian regression, random forest, XGBoost and spatial cluster) are used. Boruta, random forest and XGBoost are used to select the important features to investigate the moral aspects. Bayesian regression is used to get the odds and opportunity for the transition of each variable and spatially formed based on the information from the logistical intercepts. The best method is selected based on the highest accuracy value to deliver the information on the relationship between moral status categories in the selected 32 provinces in Indonesia.FindingsA different variable on moral status in each province is found. The XGBoost finds an accuracy value of 93.42%, which the three provincial groups have the same information based on the importance of the variables. The strategy of IBs’ moral messages by sending the verse of al-Qur’an and al-Hadith (traditions or sayings of the Prophet Muhammad PBUH) and simple messages reminders do not impact the customers’ repaying their debts. Both Muslim and non-Muslim groups are primarily found in the non-moral group.Research limitations/implicationsThis study does not consider socio-economic demographics and culture. This limitation calls future works to consider such factors when conducting a similar topic.Practical implicationsThe industry professionals can take benefit from this study to understand the Indonesian customers’ moral status in repaying credit card debt. In addition, future works may advance the recent findings by considering socio-cultural factors to investigate the moral status approach to Islamic credit warnings that is not covered by this study.Social implicationsThis work finds that religious text of credit card repayment reminders sent to Muslims in several provinces of Indonesia does not affect their decision to repay their debts. To some extent, this finding draws a social issue that the local IBs need to consider when implementing the strategy of credit card repayment reminders.Originality/valueThis study credits a novelty in the discourse of data science for Islamic finance practices. Specifically, this study pioneers an example of using data mining to investigate Islamic-moral incentives in credit card debt repayment.

Information disclosure and credit card repayments: evidence from Malaysia

PurposeThis study analyzes the role of information disclosure in influencing credit card repayments by focusing on three intervention methods for improving repayment decisions among credit cardholders.Design/methodology/approachThis study uses the survey method to collect data. Four questionnaires are designed to identify which types of disclosure elicit better repayment decisions among credit cardholders. The participants were approached using the mall intercept method, and a total of 1,775 responses were obtained.FindingsEstimations using means comparison tests show that not providing minimum payment information improves repayments. The expected benefits are not delivered by the provision of higher minimum payment information or additional information that highlights the negative effects of making the minimum repayment only. Further analysis using logit estimation reconfirms the benefit of not providing minimum payment information. However, when such information is given, low minimum payment information elicits better repayment decisions than high minimum payment information or additional information. Repayment worsens under the additional information condition compared to the high minimum payment condition.Research limitations/implicationsThe findings of this study have a bearing on the decisions of policy makers, credit card issuers and consumers.Originality/valueThis paper clarifies the role of information in improving debt repayment decisions.

Bayesian Behavior Scoring Model

Although many scoring models have been developed in literature to offer financial institutions guidance in credit granting decision, the pur pose of most scoring models are to improve their discrimination ability, not their explanatory ability. Therefore, the conventional scoring models can only provide limited information in the relationship among customer de mographics, default risk, and credit card attributes, such as APR (annual percentage rate) and credit limits. In this paper, a Bayesian behavior scor ing model is proposed to help financial institutions identify factors which truly reflect customer value and can affect default risk. To illustrate the proposed model, we applied it to the credit cardholder database provided by one major bank in Taiwan. The empirical results show that increasing APR will raise the default probability greatly. Single cardholders are less accountable for credit card repayment. High income, female, or cardholders with higher education are more likely to have good repayment ability.

Unsticking credit card repayments from the minimum: Advice, anchors and financial incentives

A significant proportion of credit card users persistently make the minimum repayment on their debt. Using an online experiment, we study how behavioral factors (advice, anchoring, and financial incentives) affect minimum debt repayment behavior. Our results show that although information interventions (advice and anchoring) have significant nudging effects on increasing repayments, the interventions that combine information with financial incentives have the largest effect, roughly doubling the information effects. Our results show that advising individuals to make a higher repayment and offering a financial incentive has a significant impact on individual debt repayment decisions, and can thus substantially reduce future debt burden.

Financial literacy, money management skill and credit card repayments

AbstractThis 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.

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

A significant proportion of credit card users persistently make low repayments on their debt. This paper tests whether a financial tool known as Prize Linked Debt (PLD) can increase credit card debt repayments amongst borrowers who repay the minimum, using an online experiment. PLD entails a prize threshold set above the credit card minimum repayment threshold. A borrower can become eligible to win a prize by repaying on or above this prize threshold. A prize threshold set above the minimum increases repayments by 31% amongst borrowers who repaid the minimum before being offered PLD. The probability of repaying the minimum falls by 69.1% for this population. This effect is driven by financial advice, anchoring and the skewness of the financial incentive.

Active Choice Format and Minimum Payment Warnings in Credit Card Repayment Decisions

The increasingly common online credit card repayment formats typically involve consumers’ active choice from among various payment amounts. Consumers rarely view minimum payment warning (MPW) disclosures while repaying online; therefore, the common shift toward online repayment means that the MPW is not salient for most credit cardholders. This article aims to shed light on credit cardholders’ payment decisions under this “active choice format” and explore effective online interfaces for payment decisions. Drawing on research in active choice, the authors demonstrate in three experiments that, compared with the “open format” used in traditional monthly statements, active choice format increases consumers’ full balance payment propensity and overall repayment amount, and this effect is even stronger when current account balance is included in the choice context. Furthermore, presence of the MPW disclosure significantly decreases payment of the minimum required amount and increases payment of the “three-year payoff amount.” Finally, presence of MPW increased consumer feelings about making the right decision, primarily for financially vulnerable people. These findings, based on hypothetical scenario choices, offer interesting theoretical and important policy implications.

Does Responsibility for Financial Tasks Influence Credit Knowledge and Behavior?: Evidence from a Panel of US Couples

Managing financial matters, an important household task, is often handled by one partner. The decisions executed by the household financial manager have important implications for household financial well-being. The division of responsibility contributes to the accumulation of financial knowledge and experiences that build financial capability. Using unique panel data from the Survey of Consumer Payment Choice, this study examines who couples choose to manage household finances and how the division of financial responsibility influences credit knowledge and behavior. We find that partners who earn more are more likely to be responsible for managing savings and investments as well as paying monthly bills controlling for individual- and household-level fixed characteristics, like ability. We also find that the partner who defers responsibility for savings and investing is less likely to know their credit rating. This finding holds when controlling for measured financial literacy. We do not find evidence that deferring financial responsibility is associated with estimated credit score nor credit card repayment behavior.

Financial Literacy and 401(K) Loans

Based on a survey of nearly 900 401(k) participants, we find that borrowing in 401(k) plans is related not only to standard demographic factors, but also to measures of general financial literacy, 401(k) contribution rates and wealth, non-retirement wealth, and credit card repayment behavior. Taken together, these results suggest that the decision to borrow from a 401(k) plan is linked to a broader impatience in financial decision-making, namely high discount rates in time preferences. Meanwhile, conditional on loan-taking, financial literacy appears unrelated to whether a given loan is used for consumption or investment purposes. Given the interrelated nature of these borrowing and behaviors, efforts to educate participants about the benefits and risks of 401(k) borrowing may need to be more comprehensive in scope than previously realized.

How Do Americans Repay Their Debt? The Balance-Matching Heuristic

In Gathergood et al. (forthcoming), we studied credit card repayments using linked data on multiple cards from the United Kingdom. We showed that individuals did not allocate payments to the higher interest rate card, which would minimize the cost of borrowing, but instead made repayments according to a balance-matching heuristic under which the share of repayments on each card is matched to the share of balances on each card. In this paper, we examine whether these results extend to the United States using a large sample of TransUnion credit bureau data. These data do not provide information on interest rates, so we cannot examine the optimality of payments. However, we observe balances and repayments, so we can examine balance-matching behavior. We replicate our analysis and find that Americans also repay their debt in accordance with a balance-matching heuristic.

Suboptimal Credit Card Repayments: A Laboratory Experiment

This paper studies the sources of suboptimal allocations observed in credit card repayments using a diagnostic laboratory experiment. Using a series of treatments, we present two main findings. First, suboptimal allocations persist in extremely simple choice environments. Particularly, neither optimization ability nor limited attention to interest rate information is sufficient to explain the suboptimal allocations. Second, while increasing the vividness of interest rate information does not help subjects make better decisions, changing the negative frame of the credit card repayment problem to a positive mutual fund investment frame substantially improves the quality of decisions. Using additional treatments, we show that there are clear asymmetric patterns in the way that subjects attend to information across financial frames. These patterns are also consistent with asymmetric heuristic use. We discuss the implications of our results for developing consumer protection policies, evolution of wealth inequality, and economic models of attention.

Age differences in financial decision making:The benefits of more experience and less negative emotions

AbstractThe emerging literature on aging and decision making posits that decision‐making competence changes with age, as a result of age differences in various cognitive and noncognitive individual‐differences characteristics. In a national life‐span sample from the United Kingdom (N = 926), we examined age differences in financial decisions, including performance measures of sunk cost and credit card repayment decisions, and self‐report measures of money management and financial decision outcomes. Participants also completed four individual‐differences characteristics that have been proposed as relevant to financial decision making, including two cognitive ones (numeracy and experience‐based knowledge) and two noncognitive ones (negative emotions about financial decisions). First, we examined how age was related to the four financial decision‐making measures and the four individual‐differences characteristics. Older age was correlated to better scores on each of the four financial decision‐making measures, more experience‐based knowledge, less negative emotions about financial decisions, whereas numeracy and motivation were not significantly correlated with age. Second, we found that considering both the two cognitive and the two noncognitive individual‐differences characteristics increased predictions of financial decision making, as compared with considering either alone. Third, we examined how these four individual‐differences characteristics contributed to age differences in financial decision making. Older adults' higher levels of experience‐based knowledge and lower levels of negative emotions seemed to especially benefit their financial decision making. We discuss implications for theories on aging and decision making, as well as for interventions targeting financial decisions.

An Empirical Investigation on Credit Card Repayment Pattern of Academicians in Malaysia

The credit card market has witnessed tremendous growth resulting from a paradigm shift in technology. The genuine usage of credit cards as a form of convenience has diverged to overspending, irresponsibility, revolving liability and bankruptcy. This implies that possession of credit cards has brought about a change in users’ repayment behavior. Thus, this study aims to determine academicians’ credit card repayment pattern in a private tertiary institution in Malaysia. The dependent variable is the repayment pattern and the independent variables that serve as the attributes include personal attitude and spending pattern, while, gender and parenthood serve as the moderating variables. Findings revealed that personal attitude and spending pattern were important attributes in determining the repayment pattern among the academicians. Gender and parenthood were found to play a moderating role in the repayment pattern. Findings from this study is expected to facilitate the government and credit card companies to work towards nurturing a financially healthier and informed society, and also to each out positively to the younger generations through the influence of the academicians.

I Will Pay Tomorrow, or Maybe the Day After. Credit Card Repayment, Present Biased and Procrastination

Procrastinating the repayment in full on a month‐to‐month balance in credit card debt is a problem affecting a large segment of the population. This paper studies the role that present‐biased preferences and impatience play in the repayment behaviour of consumers. Evidence from a field study using a sample of 380 college students provides empirical support to the hypothesis that individuals with present‐biased preferences tend to adopt a strategic procrastination repayment behaviour that is not optimal to accomplish repayment in full. More specifically, individuals suffering from self control issues and using credit cards to bridge unexpected shortage of income are more likely to fail to repay credit cards in full in the period after the purchase was completed, therefore, carrying over a month‐to‐month balance. In addition, people with a simple present‐biased revealed effect are also more likely to fall behind on credit card repayment, vis‐à‐vis those that have a higher marginal propensity to save. By the same token, we find that individuals consistently behave inconsistently, that is evidence from our sample indicates the predominance of dynamically inconsistent preferences, in opposition to the prescriptions of the neoclassical theory. In this regard, the naïve type of individuals with present‐bias preferences consume beyond their income capabilities and are much more likely to carry over credit card debt into the next period, vis‐à‐vis individuals that are more sophisticated.

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

We investigated two aspects of credit card repayment decisions: the extent to which the anchoring effect of minimum repayment information may be mitigated by information on alternative anchors, specifically repayments that would repay the balance in two years (Study 1) or nine months (Study 2); and the role of future repayment concern. In two experiments, three realistic credit card statements were presented with different outstanding balances. Participants, who were randomly allocated to one of four information conditions depending on supplementary information provided on the statements, stated how much they would repay that month. They were then asked about concerns they would have about repayment difficulties if they had a fixed consumer loan over three years. In Study 1 the alternative two-year repayment anchor had a negative effect on percent repayment, whereas in Study 2 the nine-month repayment anchor had a significant positive effect, especially for those with higher future repayment concern. Also, in both studies, future repayment concern had a direct inverse effect on repayment decisions which partially mediated the effect of disposable income. It is concluded that the addition to credit card statements of a table of cost and duration information for a range of repayment amounts may usefully support repayment decisions.

Moral Incentives in Credit Card Debt Repayment: Evidence from a Field Experiment

We study the role of morality in the decision to repay debts. Using a field experiment with a large Islamic bank in Indonesia, we find that moral appeals strongly increase credit card repayments. In our setting, all of the bank’s late-paying credit card customers receive a basic reminder to repay their debt one day after they miss the payment due date. In addition, two days before the end of a ten-day grace period, clients in a treatment group also receive a text message that quotes an Islamic religious text stating that “non-repayment of debts by someone who is able to repay is an injustice.” This message increases the share of customers meeting their minimum payments by nearly 20%. By contrast, sending either a simple reminder or an Islamic quote that is unrelated to debt repayment has no effect on the share of customers making the minimum payment. Clients also respond more strongly to this moral appeal than to substantial financial incentives: receiving the religious message increases repayments by more than offering a cash rebate equivalent to 50% of the minimum repayment. Finally, we find that removing religious aspects from the quote does not change its effectiveness, suggesting that the moral appeal of the message does not necessarily rely on its religious connotation.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Credit card balances and repayment under competing minimum payment regimes

Although much research has been done on financial literacy and the use of credit cards, ours is the first to focus on the mathematics of competing credit card minimum payment regimes. The lack of prior research is surprising because the Office of the Comptroller of the Currency does not specify exactly what form a credit card minimum payment should take, and yet we show that competing credit card minimum payment regimes have significantly different impacts on both the rate of accumulation and level of credit card debt and also on the time taken to pay that debt off. We give closed-form solutions for the balance owing under competing repayment regimes and two spending scenarios. In addition, we discuss the policy implications for credit card and banking regulators and the personal finance implications for individual consumers using credit cards.