Consumer Misunderstanding of Credit Card Use, Payments, and Debt: Causes and Solutions

Abstract

The authors identify several judgmental biases related to paying off credit card debt. Participants with stronger numerical skills made fewer errors, as did those who used the new statement format mandated by Congress in the CARD Act of 2009. Study 1 shows that people underestimate how long it takes to eliminate a debt when payments barely cover interest owed. Study 2 shows that less numerate people tend to underestimate the monthly payment required to pay off a debt in three years, whereas more numerate people tend to overestimate the payment. The newly revised statement required by the CARD Act substantially reduced these biases. However, even with the new statement, many people still underestimate required payments when still using the credit card. Study 3 identifies ambiguities in the revised statement that can lead to misjudgments about how much to pay on monthly bills. The authors recommend additional public policy actions to help cardholders understand the relationship between payments and debt elimination.