Minimum payments and debt paydown in consumer credit cards |
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Authors: | Benjamin J. Keys Jialan Wang |
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Affiliation: | 1. The Wharton School, University of Pennsylvania and NBER, Philadelphia, PA 19104, United States;2. Department of Finance, University of Illinois at Urbana-Champaign, Champaign, IL 61820, United States |
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Abstract: | Using a data set 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. To explain the prevalence of low payment amounts, we exploit changes in issuers’ minimum payment formulas to quantify the explanatory power of two potential theories: liquidity constraints and anchoring. At least 22% of near-minimum payers (and 9% of all accounts) respond to the formula changes in a manner consistent with anchoring as opposed to liquidity constraints alone. Our results show that anchoring to a salient contractual term has a significant impact on household repayment decisions. |
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Keywords: | Anchoring Liquidity constraints Credit cards Consumer finance Minimum payments D11 D14 G21 |
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