Can default options lead to credit card default? : an empirical analysis of the effect of altered default options on credit card repayment behavior in Norway

Abstract

The aim of this thesis is to study the effect on repayment behavior of a regulation imposed on all Norwegian credit card issuing institutions in 2017. The intervention involved changing the invoice default option from the minimum to the full outstanding credit card balance. Using a sample of 25% of Eika Kredittbank’s credit card customers, covering all transactions and repayments from May 2015 through December 2019, we document that the Norwegian government’s attempt to increase repayment of credit card debt was successful. We apply a fixed effects estimator at the individual level and find a positive but small average effect of the default option change on repayment ratio. As we believe that the observed small effect could be related to the fact that average repayment in Norway is high, we aimed to examine whether the impact would be larger for customers that initially paid a smaller proportion of their credit card balance. For this purpose, we divided customers into groups based on pre-regulation repayment patterns. The division and subsequent analysis suggest that as a response to the change, near-minimum and medium paying customers show an increase of 19.2 and 7.5 percentage points, respectively. The findings demonstrate the power of the default effect, and suggest that nudging through default options have important implications.