In behavioral economics, "anchoring" is a well-known phenomenon, and so it’s not surprising that when people get credit-card statements, the lower the minimum payment, the less they’re likely to pay.
According to the Economist, the minimum-payment boxes are actually a counterproductive legal requirement, rather than credit-card company deviousness:
In order to stop borrowers from being socked by an accumulation of unpaid interest whenever they fail to pay their bill, there are laws requiring credit-card companies to specify a minimum payment in each statement. But these may do more harm than good, suggests Neil Stewart, a psychologist at Warwick University.
Now this study was done in the UK, which of course has different laws to those in the US. So I asked Adam Levitin of Credit Slips what he thought of the way the Economist framed the issue. His reply was so long and interesting that I can’t hope to summarize it, I’ll just post the whole thing here. But boiled down, you can be sure that the credit-card companies would be doing exactly what they’re doing whether there was a legal requirement or not.
I hadn’t seen the economist piece. Very interesting. Minimum payment amounts definitely have an anchoring effect. The card industry has been very quick to internalize the insights of behavioral finance and apply them to maximize profit by exploiting consumers’ cognitive biases. There’s probably no other industry that knows as much about consumer behavior, and they are constantly learning more–now as part of data security measures, the card networks are trying to get SKU data from merchants that will let them know the specific content of consumer purchases (e.g., two bags of oreos), not just that it was at a supermarket or a gas station. And card issuers will change rates depending on where you shop–see what happens if you get your tires retreaded or go to marriage counseling or a massage parlor. Behavioral pricing is what it’s called.
As for the legal requirement, there is sort of one, but it is pretty open. Card issuers must merely state "The date by which or the time period within which the new balance or any portion of the new balance must be paid to avoid additional finance charges. If such a time period is provided, a creditor may, at its option and without disclosure, impose no finance charge when payment is received after the time period’s expiration." 12 C.F.R. 226.7(j). So a card issuer doesn’t have to have a "minimum" payment–it could be the entire payment. There’s no requirement as to what that minimum payment must be. Most national banks require between 2% and 4%, and the OCC has suggested that a level that would not lead to positive amortization (but over what time frame?) would not be viewed as a safe and sound banking practice.
Notice, btw, that minimum payments can also be used to manipulate card performance metrics–some card issuers will lower payments to as low as 1% of outstanding balances when a card becomes say 5 months delinquent, in order to keep it performing and avoid having to charge off the balance when the card becomes 180 days delinquent.
More to the point, there’s no requirement of how issues must feature the minimum payment amount. While the content of credit card bills is subject to some regulation, the form the bill is entirely up to the issuer. This contrasts with solicitations, where the form is also regulated to a degree (by requiring the Schumer box). Given the lack of regulation, I’m actually surprised that issuers don’t emphasize the minimum payment more heavily than they do, but there’s probably some limit–at some point it might become deceptive. There’s probably been some market testing on this.
One thing the Economist piece didn’t spell out is why card issuers want consumers to make smaller payments. Card lending is different from say auto lending. The auto lender wants to be repaid its principal and interest on time. Not so with the card lender. The card lender often isn’t looking to get the principal repaid. Instead, the interest rate and fees returns are high enough that they cover the cost of the principal. The principal remains outstanding, and the ideal consumer makes minimum payments forever, making enough new charges to keep the balance from ever amortizing. In effect, the consumer becomes an annuity. This is the "Sweatbox" model of lending that Ronald Mann at Columbia has described in a 2007 article. (You can see Julie Williams, then Acting Comptroller of the Currency, describe the phenomenon in a 2005 speech in New Orleans. The speech is worth looking at in general as it shows that OCC was very aware of all sorts of bad lending practices and didn’t do anything to stop them.)
Again, thanks for bringing this to my attention. You know, btw, that the Fed’s UDAP regulations are due out Friday. We’ll see just how bold the Fed was in the end.
Generally I think that the Feds have been well-intentioned but ineffectual when it comes to regulating credit card lending: the banks have been too powerful up until now. Which is why I’m hopeful about Friday. But I’ve been disappointed about such things before.