Cash or credit? In the United States, it is often the small plastic card we reach for to finalize a transaction. 

But as many people discover the hard way, one pricy impulse buy, one late or missed payment, or one emergency swipe of the plastic can lead to an intractable mountain of interest payments. Lawmakers recently stepped in to help consumers. But new research by Neal Roese, a professor of marketing at the Kellogg School, points to evidence that those regulations are not having their intended effects. They may, in fact, be making the problem worse.

In 2009, rising personal credit card debt prompted action from Congress in the form of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act. The CARD Act requires all credit card companies to include a minimum payment warning on customers’ credit card statements. The warning indicates how long it will take customers to pay off their debt if only the monthly minimum is paid.

In addition, credit card companies must also include a second scenario—the three-year payoff plan—illustrating the monthly payment required to pay off credit card debt in three years (though only when this amount is greater than the monthly minimum payment).

The reasoning was clear: Make it easy for credit card users to make informed financial decisions by providing them a clear, concise picture of their credit debt, and they will pay off that debt much more readily. Moreover, the thinking goes, presenting credit card users with a three-year payoff plan will help them earn savings in the long run, since paying off their credit cards according to a set plan will help them avoid interest charges.

But how successful are these dual-payoff scenarios at encouraging consumers to pay down credit card debt as quickly as possible? Although the CARD Act was passed with good intentions, it turns out that seeing the three-year payoff scenarios in fact encourages people to make lower monthly payments than they otherwise would, according to Roese.

Roese’s research, conducted with UCLA professor Hal Hershfield, suggests that customers infer that the three-year payoff plan is the more appropriate path to take—even if they have the means to pay more per month and, therefore, erase their debt much faster.

“People tend to flock to this three-year amount, this second scenario,” Roese says. “But what is the best thing for you? That’s not what the credit card statement is saying, but people seem to be reading that into it.” To offset this impulse, their research found, it is better to explicitly tell people they can pay up to the full amount they owe on a credit card bill or to remove completely all mentions of a second payoff scenario.

A Hefty Charge

Roese and Hershfield decided to delve into credit card statements after examining the dual-payoff scenarios presented on their own credit card statements. A recent statement one of them received showed a balance of $2,601. With a minimum monthly payment of $25, the card would be paid off in 11 years. Alternatively, the statement noted, paying $71 per month would lead to the card being paid off in three years—for a “savings” of nearly $1,200.

“We thought it was funny and amusing that this credit card statement would use the word savings,” says Roese, who observed that the savings being hawked was really just the difference in the amount of interest paid over time.

Across seven experiments, the pair investigated whether, when presented with a dual-payoff scenario, the three-year payoff plan would act as a cue for consumers to make a smaller monthly payment than they otherwise would.

In one experiment, for instance, more than two hundred adults divided among three groups imagined their latest credit card bill of $1,988 had just arrived in the mail. The minimum monthly payment, they were told, was $41. Some participants were given only the balance owed and the minimum monthly payment; they chose to pay an average of $830. Other participants were also given the balance and the monthly minimum, but they were additionally informed that it would take them five years to pay off their credit card at the monthly minimum; this group chose to pay, on average, $657.

It seems counterintuitive that getting more information about the time it would take to pay off a balance would push people toward paying less. But the experiments indicated that this was nonetheless true. “It was definitely a surprise. We tested it over and over and over again to see if it was a consistent finding,” Roese says.

“Most consumers can do math. But a lot of people are just too busy to think through [credit card bills] in logical, rational terms," says Roese.

In the final group, participants received yet another piece of information: a three-year payoff scenario, in which monthly payments of $51 would pay off the balance plus interest owed in three years. This group chose the lowest average monthly payment of all: just $203. “That three-year scenario amount seems to be really luring people,” says Roese. “Most consumers can do math. But a lot of people are just too busy to think through in logical, rational terms.”

The Plasticity of People

What might be done to encourage people to make smarter financial choices? Roese and Hershfield’s research shows that the three-year payoff cue can be effectively negated if customers are presented with a range of payments they can make, including paying off the full balance. When study participants were shown statements that reminded them “You can pay any amount between $0 and the maximum payment” in addition to providing the three-year payoff plan, more participants opted to pay the full balance compared with participants who were presented with only a three-year payoff scenario.

A reminder like this is so influential because it lets customers know that they have some freedom, says Roese, encouraging them to consider all of the possible payment scenarios. Once people realize that the monthly minimum and the three-year payoff plan are merely suggestions, they may choose to make a larger payment.

The biggest public policy implication from the research, according to Roese, is that any revision to the 2009 CARD Act should get rid of the requirement that credit card companies include a three-year payoff plan on their statements, which people tend to interpret as a default amount to pay.

“That default is something that matters,” says Roese. “What if the default were the full balance?”

Roese did not test consumers by presenting them the full balance as a default payment, but it is a “reasonable inference,” he says, to think that we have engineered bad credit behavior by introducing three-year payoff plans to people’s credit card statements.

Whatever changes policymakers enact, nearly one-third of the people Roese and Hershfield surveyed in summer 2013 said they only ever looked at their credit card statements online, a condition that sufficiently insulates them from the possible negative effects of the CARD Act, which applied solely to paper credit card statements. But among people who routinely received paper statements, those who read their credit card statements in full were less likely to make a larger payment.

Sometimes it pays to ignore the fine print.

Artwork by Yevgenia Nayberg