We study nudges that turn out to have precise null effects in reducing long-run credit card debt. We test nudges across two field experiments covering 183,441 UK cardholders. Our first experiment studies nudges added to monthly credit card statements. Our second experiment studies letters and email nudges (separate from monthly statements) sent to cardholders who signed up to automatically pay the minimum required payment. In a follow-up survey to our second experiment, we find that 96% of respondents underestimate the time it would take to fully repay a debt if the cardholder made only the minimum required payment. The nudges reduce this confusion, but underestimation remains overwhelmingly common.

Coverage in the Chicago Booth Review 

Updated version of The conflict between consumer intentions, beliefs and actions to pay down credit card debt

Credit card minimum payments are designed to ensure that individuals pay down their debt over time, and scheduling minimum automatic repayments helps people avoid forgetting to repay. Yet minimum payments have additional, unintended psychological default effects by drawing attention away from the card balance due. First, once individuals set the minimum automatic repayment as the default, they then neglect to make the occasional larger repayments they made previously. As a result, individuals incur considerably more credit card interest than late payment fees avoided. Using detailed transaction data, the authors show that approximately 8% of all of the interest ever paid is due to this effect. Second, manual credit card payments are lower when individuals are prompted with minimum payment information. In an experiment, the authors test two new interventions to mitigate this effect—a prompt for full repayment and a prompt asking those repaying little to pay more—yielding large counter effects. Thus, shrouding the minimum payment option for automatic and manual payments and directing attention to the full balance may remedy the unintended effects of default minimum payments.

Coverage in the Chicago Booth Review 

While popular with policymakers, most evidence on consumer financial disclosure’s effectiveness studies borrowing decisions (where optimality is unclear) or lab experiments (where attention is not scarce). We provide field evidence from randomized controlled trials with 124,000 savings account holders at five UK depositories. Treated consumers were disclosed varying degrees of salient information about alternative products, including one with their current provider strictly dominating their current product. Despite switching taking roughly 15 minutes and the moderate average potential gains ($190/year), switching is rare across disclosure designs and depositors. We find pessimistic beliefs drive disclosure inattention and limit disclosure’s effectiveness, helping explain deposit stickiness.

In 2018 the Financial Conduct Authority identified that pawnbroking customers are not always collecting the ‘surplus’ money owed to them. Surplus money is generated when a customer defaults on their loan and their pawned item is sold at auction for more than what is owed by the customer. Although there is a process for notifying customers when a surplus is generated, collection rates are low. In the current paper we share the results of a first intervention designed to address this. We partnered with one of the UK’s largest pawnbroking lenders to trial a novel behavioural design approach. A first intervention, a new reminder letter for customers, is reported in this paper and found to increase surplus collection rates significantly. A second experiment, focused more on interventions on pawnbroker store processes, is currently in the field.

We study consumer responses to a randomised field experiment on credit card debt repayment. This intervention shrouds the option to automatically pay the contractual minimum at the end of each pay cycle. This increases the salience of the other automatic payment option: cardholders can select a fixed monthly payment, which is typically more than the contractual minimum. The intervention results in a very large increase in the amounts consumers select for automatic payment. However, it has no effect on other, more important outcomes: total debt repayments (including both automatic and nonautomatic – ie manual – payments), credit card spending, borrowing costs or debt net of payments. These null effects arise primarily because consumers in the treatment group offset their increased automatic payments by reducing the value of their (infrequent) manual payments. The intervention also causes a modest reduction in consumers selecting any type of automatic payments, which leads to a small increase in arrears.

We investigate ways to encourage consumers to repay more of their credit card debt, which would lead to earlier full repayment, lower interest costs and reduced risks to credit scores, which can be affected by carrying long-term debt. Previous academic research has shown that consumers are strongly influenced by the inclusion of the minimum payment amount on their credit card bill, leading some consumers to pay less than they otherwise would. Through an online experiment, we replicate results from previous research, that removing the minimum payment amount from bills causes an upward shift in repayments - away from the minimum and towards the full amount. This lends further support to the theory that the minimum amount acts as an ‘anchor’ or ‘target value’, biasing payments downwards. We also find that including a prompt to pay the balance in full causes a large increase in the probability of paying in full. For those who choose to pay the minimum amount or close to it, prompting them to choose higher payments which would clear the debt in 1, 2 or 3 years results in many choosing to increase their repayment, with none choosing to decrease it. All 3 effects resulted in large changes to the distribution of repayments, with fewer people choosing to pay the minimum, more people choosing to pay the full amount and an increase in average repayments. 

How are we affected by financial advertising? What do we pay attention to and when might we be misled? We explore the science of advertising to answer these questions. Building on earlier FCA work into behavioural biases, we summarise a large body of academic literature to explore the mechanisms behind consumer attention, understanding, and behaviour. We build this into a framework for understanding how consumers process information in the form of advertisements, divided into three stages: See, Interpret and Act. We then apply our findings in a novel setting: explaining what the science says about when an advert may be unclear, unfair or misleading. In See, we find that attention may be predicted by the relative salience of information and is also affected by consumers’ motivation and intentions; for example, those searching for a house are more likely to notice mortgage deals. In Interpret, we find that certain ways of presenting information, particularly those which make use of behavioural biases or which involve percentages may impede understanding and have the potential to mislead consumers in certain circumstances. In Act, we see that consumers may be influenced into action through techniques which encourage reliance on heuristics or emotion, rather than reason, and that this may cause problems. Throughout, we offer fictitious examples of adverts to illustrate the behavioural points we observe and we suggest further areas for research which can guide our actions.

The majority of British home and motor insurance policies automatically renew annually, at a price chosen by the provider, unless consumers actively switch or negotiate. Auto-renewal can be beneficial to consumers for example by ensuring continuity of cover. However, the media, consumer groups and politicians have expressed concern that some consumers, often the elderly or vulnerable, pay high prices as a result of automatic renewal. In collaboration with one home insurer and two motor insurers, we conduct field trials to test the potential for improved renewal notices to encourage consumers to switch or negotiate their policy at renewal. We also use bespoke survey data linked to administrative data from a home and motor insurance provider as well as aggregated data on price levels from several other insurance providers. 

Aggregated data from three home insurance providers suggests that average premiums increase in the first five years until they plateau. Our survey evidence for a home insurer suggests that customers underestimate the benefits of shopping around and overestimate the amount of time it takes. The evidence is compatible with Gabaix and Laibson’s (2006) ‘shrouded equilibrium’ model, where consumers do not anticipate that they will purchase additional products at high prices when they are purchasing the original product (although we do not have evidence that firms are making overall excess profits). Our evidence for the motor insurance providers varies by insurer, with consumers showing fewer signs of inertia and some firms showing little evidence of price increases at renewal. 

We find that putting last year’s premium on renewal notices causes between 11% and 18% more consumers to switch or negotiate their home insurance policy. The effect is larger for consumers offered higher price increases at renewal. We find little evidence of price increases at renewal for customers at the two motor insurers and including last year’s premium has no effect. Other changes to renewal notices, including simplifying renewal notices, sending information leaflets, and sending reminders have little or no impact on consumer behaviour.