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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

Svardahl, Ailin; Aalen, Håkon Kielland
Master thesis
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URI
https://hdl.handle.net/11250/2734770
Date
2020
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  • Master Thesis [4207]
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.

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