The minimum payment listed on credit card statements is supposed to be just that — the exact dollar figure a consumer has to pay each month on their outstanding balance to avoid penalties. But according to new research by Wharton real estate professor Benjamin Keys, the minimum payment is often an anchor that consumers use to decide how much to pay on their account regardless of their ability to pay, which only deepens their debt and costs the nation billions of dollars a year.

Keys is the co-author of “Minimum Payments and Debt Paydown in Consumer Credit Cards.” In the working paper, published in October by the National Bureau of Economic Research, Keys and co-author Jialan Wang of the University of Illinois at Urbana-Champaign found that minimum payments bias consumers toward making lower payments than would be financially prudent. The research is one of the few attempts to examine America’s love affair with revolving credit — $712 billion of it as of May 2016 — from the repayment side instead of the consumption side, Keys says.

Using data from the Consumer Financial Protection Bureau, where Wang was an employee when the research was conducted, the researchers found that only about one-third of consumers are paying their balances in full each month. The remainder, about 67% of accounts, are paying interest and carrying balances month-to-month. And about half of those consumers are paying exactly or close to the minimum payment each month, but the data didn’t show why consumers were making those choices.

“We wondered if they are doing it because they are constrained by their liquidity or whether they’re using their minimum payment as a guide or anchor,” he says.

Keys looked at monthly, account-level data over five years and merged it with credit bureau data to provide an overview of each borrower’s credit portfolio. Within the time frame of the data, Keys was able to observe several minimum payment changes by credit card issuers, which allowed him to observe the corresponding change in behavior by borrowers.

“You could nudge people who need a nudge without harming people who value flexibility.”

According to Keys, the assumption was that consumers who were making minimum payments due to liquidity constraints would either become delinquent if the payment increased beyond their means or bunch at the new minimum. For those who used the minimum payment as an anchor — say, those who would automatically pay the minimum plus $40 regardless of their liquidity or the balance — the change in the minimum would be matched by a corresponding change in payment with the arbitrary additional funds thrown in.

By and large, the researchers’ analysis supported their assumptions. Very few consumers experienced defaults or late payments when minimum payments increased, and those who were paying near the minimum continued to do so by approximately the same amounts after the increase, suggesting their decisions were not based on financial constraints.

“They’re paying off high-interest debt more slowly because they’re using a rule of thumb that isn’t necessarily calibrated to their own personal situation or is not a defined repayment plan,” Keys notes. “That flexibility is a double-edged sword.”

‘A Drop in the Bucket’

Keys also examined the effect of the Credit Card Accountability Responsibility and Disclosure (CARD) Act, which went into effect six years ago. Among the law’s consumer-based reforms was requiring credit card statements to routinely include information telling consumers how much they have to pay on their balance to eliminate their current debt in three years, a move that was supposed to help empower consumers to better control their outstanding balances.

But the change had almost no effect, Keys says. Fewer than 1% of accounts adopted the three-year repayment plan, and within a year, a third of those consumers had dropped the strategy all together. The disclosure did save consumers $62 million in interest per year — not insignificant, but a “drop in the bucket” compared to the $2.7 billion to $4.7 billion that could have been saved if all consumers who were anchored to the minimum payment had made the same move, he adds.

“This sort of repayment behavior is pretty tightly ingrained in what their current processes are,” he says. “This wasn’t a big enough nudge to get them out of it.”

The implications of Keys’ data on minimum payments suggests credit card companies could do well by offering their customers a menu of repayment plans to let them, for example, pay off Christmas presents by the time Christmas rolls around again. Or companies could deemphasize the minimum payment figure on credit card statements by asking consumers to pre-commit to a repayment schedule when they sign up for the card.

Ultimately, Keys says the research is best viewed alongside the volume of research on consumer consumption to understand the totality of credit card debt. If consumers can better understand the implications of a revolving line of credit charging 16% interest per month, it could release some of the burden on consumers without cutting out those who may need the spending power the most.

“You could nudge people who need a nudge without harming people who value flexibility,” he says.