Payment Reminders and Credit Card Debt

The Urban Institute did a study on credit card holders in the United States and found that nearly half of them are revolvers, meaning they carry a balance on their credit card from month to month. This is an incredibly common habit, is very easy to do, and can get expensive very quickly.

This was a blind study, individuals were picked at random and did not know they were participating, researchers only saw anonymous data about each participant’s credit card usage/debt. Roughly 14,000 customers of the Arizona Federal Credit Union participated and it was funded by the CFPB.

Credit card debt has been steadily growing over the last few years, with the average US household holding ~ $5,700 in credit card debt, and about 133 million people with a balance on at least one card. The objective of this research was to determine whether periodic reminders about financial “rules of thumb” can help individuals pay off their outstanding credit card debt.

Researchers used these rules/slogans:

  1. “Don’t swipe the small stuff. Use cash when it’s under $20.”
  2. “Credit keeps charging. It adds approximately 20 percent to the total.”

These messages were sent randomly to the blind participants by email twice a month (in subject line); by a banner ad shown when they logged onto the banks website; and by mailing a refrigerator magnet calendar with the rule of thumb posted. A control group received no messages.

The Outcome:

  • The first rule resulted in credit card balances that were on average 2 percent lower than they would have been without the intervention.
  • The second rule did not result in a significant effect over all the participants.
  • But, some small groups of participants, like those under age 40, showed results. For those groups, revolving debt was $160 lower from second rule and $173 lower from the first rule.
  • Overall the study produced “moderate” effects, at a low cost, about 50 cents per person.

This study shows that considering the low cost of implementation, using rules of thumb can be an effective method when delivering financial education and advice for improving financial health and payment habits.

If you are experiencing credit card debt…

  • Calculate how long it will take to pay off the balance.
  • If your balance is on a high interest card and you have a strong credit score, you may be able to apply for a promotional, 0% interest, balance transfer card (usually a 9 to 18 month long promotional period). For qualified individuals this gives them time to pay off their balance without accruing a mountain of interest.
  • Always set up automatic payments from your bank account, this way you will never forget to pay the bill.
  • If you have to carry a balance, try to keep it below 7 – 10% of the limit.

With new trending credit card data being used by banks to evaluate risks for mortgage application and pricing, it is very important for consumers planning on getting a mortgage within the next 2 years, to keep their balances low. It is valuable for potential applicants to minimize their revolving balances during the years before loan application if they want the best pricing.

If you have any questions about managing your credit or would like us to review your credit reports, please reach out to one of our credit experts for a free credit review.