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An Opt Out Payment Plan for Credit Cards

posted by Michael Barr

I wanted to pick up on a theme raised by Oren Bar-Gill in his postings: credit card disclosures may be systematically designed to prey on common psychological biases that limit consumer ability to make and act upon rational choices regarding credit card borrowing.  As Oren notes, recent Fed regulations require credit card companies to disclose the minimum repayment period for a hypothetical balance and many in Congress have rightly called for more tailored disclosures, under which the company would state how long it would take, and how much interest would be paid, if the customer's actual balance were paid off only in minimum payments.  Such tailored disclosures are designed to reframe the customer's payment choice at a salient moment: the time of paying the monthly bill.

I've recently argued for a further step and I'd love reactions.  What if credit card companies were required to use an "opt-out payment plan" for credit cards, under which consumers would be required automatically to make at least the minimum payment necessary to pay off their existing balance in its entirety over a relatively short period of time (say 6 months) unless the cutomer affirmatively opted-out of such a payment plan and chose a longer payment term.

Given what we know about default rules and framing, such a payment plan may be easier to follow, resulting in lower rates of delinquency and default. In any event, an optimal payment plan may encourage card holders to alter their borrowing behavior or their payoff plans.  Moreover, credit card companies might find it difficult to argue publicly against reasonable opt-out payment plans and, in the face of such plans, to maintain a pricing model based on borrowers going into financial distress.

Thoughts?

Comments

So of course this makes eminent sense, but do you think we have reached a political inflection point where this sort of thing might skirt viability?

I think that is an excellent idea. While some may choose to go ahead and just make minimum payments anyway, this would probably prompt many to reconsider their debt repayment amounts.

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