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    'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt
    06 Dec 2020Working Paper Summaries

    'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt

    by Grant E. Donnelly, Cait Lamberton, Stephen Bush, Zoe Chance, and Michael I. Norton
    Many consumers fail to pay off credit card debt each month and suffer financial consequences. Repayment-by-purchase, allocating payment toward specific purchases on a credit card bill, helps consumers gain a sense of progress and control over credit card debt.
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    Author Abstract

    Many consumers struggle to repay their credit card debt, in part because paying small portions of large bills often feels fruitless. We introduce a novel credit card payment option—repayment-by-purchase—and examine its influence on both the amount consumers’ repay and their perception of progress toward reducing their debt. With typical repayment, consumers simply enter the amount they wish to pay toward their total balance—often the minimum required payment. With repayment-by-purchase, in contrast, consumers can select specific purchases (e.g., a coffee at Starbucks, a utility bill) that they wish to repay, and make payments specifically directed toward “eliminating” these purchases. Five studies reveal that repayment-by-purchase increases awareness of what is being repaid, which increases perceptions of progress toward reducing debt, which in turn encourages higher repayment. In a large field experiment, credit card customers who were given the opportunity to allocate their payment toward specific purchase categories paid 12.18% more toward their debt balance than a control group. These findings advance our practical understanding of how consumers can be encouraged to pay more toward credit card debt and offer conceptual insight into how both increased awareness and perceived goal progress enhance consumer motivation to get out of debt.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: November 2020
    • HBS Working Paper Number: HBS Working Paper 21-060
    • Faculty Unit(s): Marketing
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    Michael I. Norton
    Michael I. Norton
    Harold M. Brierley Professor of Business Administration
    Unit Head, Negotiation, Organizations & Markets
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