Under‑repayment can be driven by the
same factors as over‑borrowing. Present bias, combined with the ability to
push repayment further into the future, may cause some consumers to repay
less than they planned to at the time they made the purchase. Similarly,
optimism bias causes some consumers to overestimate the likelihood that they
will be able to afford to repay the debt in the future, reducing the need to
repay debt in the present.
Some cases of under‑repayment
reflect a behavioural phenomenon known as ‘anchoring’.
This refers to the influence of irrelevant but salient reference points on
decisions. In the credit card context, the minimum repayment serves as an
important reference point. A growing body of experimental research and field
studies have shown that some consumers make a smaller repayment than they
otherwise would have simply due to the presence of the minimum repayment.
Under the existing regulatory
framework, the minimum repayment amount is not explicitly regulated. The
minimum repayment is typically specified by the card issuer as the greater
of a small fixed repayment (for example, $20) or a percentage of the balance
carried forward (typically around 2 per cent of the sum of principal,
interest and some fees that are not immediately payable in full).
Banks have stated that the fraction
of consumers persistently making only the minimum repayment
is very small.
However, this likely understates the proportion of consumers who under‑repay
due to the influence of minimum repayments. Partly this reflects narrow
measurement of what constitutes a minimum repayment: consumers often exhibit
‘rounding’ behaviour when deciding how much to repay and so may pay slightly
more than the exact minimum (for example, $40 instead of $38).
A 2014 study in the United States
found that credit card repayments follow a strongly bimodal distribution and
that close to a quarter of credit card users paid the minimum or an amount
close to the minimum more than half the time.
Similar findings have been reported by the UK Financial Conduct Authority:
over 5 per cent of consumers made nine or more minimum repayments in 2014
while incurring interest, while a further 6.6 per cent of consumers
maintained ‘persistent debt’, with some of these consumers also
systematically making minimum repayments on at least one card.
Even on a low rate credit card,
under‑repayment can have a significant impact on a consumer’s financial
situation. For example, on a $5,000 balance incurring 13 per cent interest,
the difference between making the minimum repayment and paying $100 each
month is around $3,000 of interest and 15 additional years of repayment.
On a card with a 20 per cent interest rate, the difference is even more
dramatic: $14,500 of interest and 40 years of repayment."