The success in nudging consumers to pay credit card debt

• Description of the programme
• The study
• Key findings
• Points to consider

Description of the programme

Credit card debt accounted for over £900 billion in debt across the UK and US (combined) by the end of 2017. It attracts particular attention due to the amount of unsecured debt that is outstanding, the high interest rates and the widespread use of credit cards. Around one-in-four payments on credit cards are at or close to the contractual minimum in the UK. The majority of payments are made ‘manually’ – typically online – where consumers need to proactively make a payment to their credit card company once a month. This system of payments seems to be driven by there being minimal payment information available to the consumer. A smaller proportion of customers have automatic minimum payments set up, that help them avoid late-payment fees. However, in this scenario manual payments are only made infrequently, meaning that by just paying the minimum payments consumers are prolonging their debt cycle. In addition to the financial costs, struggling to repay debts has been found to have a strong negative correlation with psychological wellbeing.

This 2018 evaluation from the Financial Conduct Authority, collaborating with a UK financial lender, tests whether consumers would benefit from nudge interventions that downplay the option for automatic payments.

The study

A randomised control trial; (RCT) is conducted on 40,708 credit cards issued in early 2017. The experiment took place from February to May 2017. A large sample size was chosen to give the experiments sufficient statistical power to determine whether the intervention was responsible for changes in consumer behaviour. The credit card options that were varied on correspondence to the consumer were the automatic payment choices, which typically allow consumers to automatically pay the full amount owed each month, a fixed amount of their choice or the contractual minimum. The option for automatic minimum payments was removed from the treatment group. It was believed that this would increase the prominence of the automatic fixed payment option, that had the potential to reduce debt faster, assuming no other behavioural or financial changes.

The control group were still given the option of setting up an automated payment that simply paid the contractual minimum amount each month.

Before going into the field, qualitative consumer testing was conducted to ensure people would understand how to navigate the intervention, and to consider the ethical implications behind the intervention.

Key findings

• The intervention resulted in a large initial effect on payment choices.
• One-in-five credit card holders (20%) chose an automatic fixed payment option instead of an automatic minimum payment.
• However, while this has a significant impact on reducing the number of consumers who chose to only make the minimum payments, there is no wider effect on economic outcomes.
• For example, there are no overall effects on levels of consumer spending, the amount of outstanding debt or on borrowing costs.
• The authors state that while the initial success of the intervention is positive, the reasons for the lack of longer-term change and more holistic outcomes are unclear.
• Conditional on a consumer already having an automatic payment set up, the intervention results in significantly higher automatic payments. However, this corresponds with the same consumers almost immediately starting to make lower manual payments.
• Combining the effects of the intervention on both manual and automatic payments shows that they almost perfectly offset one another (resulting in little if any change).
• The intervention also causes more consumers not to have any sort of automatic payment set up at all, which can result in them forgetting to make their payments and falling into arrears. Based on comparisons with the control group, the level of arrears is what would be expected among consumers without automatic payments.
• While the interventions introduced by this experiment have short-term benefits, the authors state that the paper demonstrates the importance of assessing real economic outcomes over longer timeframes.

Points to consider

• Methodological strengths/weaknesses: Findings are tested for statistical significance, adding more robustness to the analysis.
• A control group is used, allowing findings from the intervention group to be compared with a group not receiving the same intervention for benchmarking purposes.
• Generalisability/ transferability: The evaluation is of significant interest to those looking to commission or authorise interventions designed to decrease the number of people who only make minimum debt repayments each month, particularly in relation to credit cards.
• Relevance: The findings are based on consumers from one major UK lender and should not necessarily be seen as representative of the entire market.