Does clearer information about interest rates help consumers?

Responsible researcher: Angelo Cruz do Nascimento Varella

Article title: READING THE FINE PRINT: INFORMATION DISCLOSURE IN THE BRAZILIAN CREDIT CARD MARKET

Article authors: Bruno Ferman

Location of intervention: Brazil

Sample size: 19,690 credit card customers

Big topic: Finance

Type of Intervention: Experiment with credit card bills

Variable of main interest: Choice of payment terms

Evaluation method: Experimental Evaluation (RCT)

Policy Problem

High-cost consumer credit is a recurring theme in academic literature, especially with regard to the protection of individuals. A particularly heated debate among researchers is based on the understanding that creditors purposely hide information about interest rates charged, in order to distort the customer's understanding of the costs incurred on credit operations. Consequently, the provision of data on consumer interest rates is a recurring issue among regulators.

However, despite the popularity of public policies aimed at providing reliable information on interest rates to consumers, there is no consensus among academics on the effectiveness of these measures. This fact is even more relevant in emerging countries, where access to credit can be restricted and particularly expensive.

Assessment Context

In Brazil, between 2000 and 2010, the volume of credit granted to consumers doubled. This expansion was particularly aggressive for credit card transactions, which increased more than 12 times in the same period, despite the high price charged, normally exceeding 10% per month. For comparison purposes, the average annual inflation in the country was less than 7% in the same period.

In part, this increase is due to the increase in the supply of credit to low-income and middle-class consumers. In particular, there has been an increase in the ease of obtaining credit through card companies associated with retail stores, which often restrict the use of cards to consumption in their own stores, or simply grant the conventional use of cards purchased by customers.

Policy Details

In Brazil, there are two common alternatives to paying credit cards from customers who have not paid their invoices in full. The individual can choose to pay off a portion of the debt equal to or greater than the established minimum payment amount, normally 15% of the total due, transferring the remainder to the next invoice, with monthly interest applied in the order of 11.89% to 15 .99%. A second option is to choose a number of months to make the payment in fixed installments. The positive side of this operation is the pre-approved granting of credit and the flexibility for the customer, who can continue to use the card.

The experiment had a partnership with a large credit card company, with more than five million customers, mostly from the middle and lower classes. 19,690 individuals were selected and classified into groups with high and medium risk propensity. On average, 30% of customers used the revolving credit option and paid around 60% of the total amount, with an average bill of 661 reais.

Assessment Method

In the months of July and September 2010, the company used three different parameters for different groups of customers, in order to validate the experiment analysis:

1. Interest rate – 3.99%, 7.49% or 11.89% per month;
2. Disclosure method – letters hidden in a footnote, within the limits of legislation, or a prominent and prominent display;
3. Payment plan duration – 6, 8, 10 or 12 months. It should be noted that customers are free to choose different deadlines, so this parameter only highlights the options offered by the company.

All parameters were randomly distributed, so that each consumer had the same probability of receiving different conditions to pay off their debts. The objective of the study is to evaluate the effects arising on customers' payment decisions based on the different parameters presented.  

Main Results

By observing customers' choices, the researcher can observe that individuals identified information regarding interest rates and acted accordingly, even in situations in which the data was discrete. When presented explicitly, risk-prone customers were the only exception, preferring to pay higher interest rates.

Regardless of the disclosure method, around 2% of customers chose plans with interest rates of around 11.89% and approximately 4% of consumers chose plans with interest rates of 3.99%. The result suggests that individuals were able to adequately measure and decide their payment strategies, regardless of the exposure of fee information.

Of the customers who preferred to pay their debts in installments, there was a clear preference for shorter plans, with 53% of consumers preferring to pay in six months, compared to 13% of individuals who chose the 12-month option. However, it is worth noting that the results change according to the options offered. Even though you could choose any period for the installment plan, the option for longer plans jumped from 16% to 56% when shorter plans were not displayed as pre-established options.

Public Policy Lessons

Contributing to the debate about public consumer protection policies, the study demonstrates that, on average, individuals are able to consider their payment alternatives, even when information about interest rates is not highlighted on their invoices. This indicates that previous research that guided the debate about the creation of protective legislation may have been mistaken, so that consumer protection should be directed to other aspects of the policy regarding the granting of credit.

Reference

FERMAN, Bruno. Reading the fine print: Information disclosure in the Brazilian credit card market. Management Science, vol. 62, no. 12, p. 3534-3548, 2016.