Academic journal article Texas Law Review

Avoiding the Anchor: An Analysis of the Minimum-Payment and 36-Month Disclosures Mandated by the CARD Act and How to Improve Cardholder Repayment Patterns *

Academic journal article Texas Law Review

Avoiding the Anchor: An Analysis of the Minimum-Payment and 36-Month Disclosures Mandated by the CARD Act and How to Improve Cardholder Repayment Patterns *

Article excerpt

I. Introduction

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) sought to ameliorate many of the debilitating problems associated with credit card use. Before the passage of the CARD Act, credit card issuers took advantage of behavioral biases and lack of consumer understanding to engage in practices that exacerbated consumer credit card debt, contributing to a national consumer debt crisis. Scholars have described credit cards as a dangerous product in need of more regulation.1 The CARD Act addressed the problem by prohibiting some "abusive" issuer practices and requiring more transparency in credit card agreements and monthly bills.

One of the more noticeable changes to credit card bills involved the minimum payment. The CARD Act amended the Truth in Lending Act of 1968 (TILA) to provide for enhanced disclosures in addition to displaying the minimum payment for any given month.2 Along with the minimum payment, monthly credit card statements must now alert customers to the downsides of paying only the minimum payment each month.3 Specifically, issuers must compare the total cost of paying off a bill by only paying the minimum monthly payment with the total cost of paying a higher amount which, if paid monthly, would pay the balance in 36 months.4 In addition, the issuer must provide a toll-free number the consumer may call to receive debt-counseling services.5

Pulling from the behavioral economic and empirical literature, this Note addresses the merits and shortcomings of the minimum-payment disclosure and the 36-month disclosure, arguing that the provisions could be improved to better help consumers climb out of debt or help consumers avoid debt in the first place. Quite simply, the two disclosures do not do enough to help credit card users escape from crippling debt. One study found that by "reframing" the consumer on the 36-month target rather than the minimum payment, the disclosures led to higher monthly payments.6 Unfortunately that 36-month payment serves as an "anchor"; many consumers chose to pay the amount that pays off the debt faster, but actually paid less than a matched cohort-meaning they might have otherwise paid more each month.7 In other words, the nudge to pay a higher or "better" amount than the minimum payment works, but the target amount paid is not optimal. Other studies find the 36-month disclosure does little to mitigate the anchor effect of disclosing a minimum payment.8

This Note suggests that studies be done to find a more optimal target. The 36-month target that Congress proposed and enacted helps some consumers pay more than the minimum monthly payment but not enough to avoid accumulating, in some cases, overwhelming amounts of debt. Additionally, the disclosure should be reformulated to be less confusing to consumers. I also suggest the possibility of raising the minimum payment. Finally, in order to better effectuate Congress's purpose, I suggest that policy makers should require issuers to implement commitment devices that would assist consumers in paying down their debt in a more efficient manner. Studies show consumers like commitment devices and are likely to use them if offered.9 It follows that consumers would be likely to opt into a payment-plan system that would allow consumers to control the way they pay off their debt along with the debt itself.

Part II of this Note addresses the major problems that exist with credit cards and the behavioral biases that allow consumers to acquire massive amounts of credit card debt despite their best intentions. Part II also describes the CARD Act's response to these problems, including the requirement of the minimum-payment disclosure and the 36-month disclosure. Part III discusses the results of empirical analysis of how the CARD Act impacts consumers' repayment behavior and what those results mean with regard to the success or failure of the 36-month and minimum-payment disclosures. …

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