Count 'em: 2 simple rules for reducing credit card debt

There are two types of credit card users: Those who pay off their balances every month, and those who don’t.

The average U.S. family with debt owes more than $15,000 on their credit cards, an amount that can take years to pay off while also leading to stress and guilt. So-called revolvers, or people who keep balances on their cards, may be simply trying to keep up with expenses that are outpacing their income, which has grown more common as households cope with stagnant pay and rising costs. 

Keeping two rules of thumb in mind can help revolvers reduce their debt, according to a new study from the Urban Institute. The first rule asks consumers to turn to cash rather than plastic if the purchase is less than $20. The second is to keep in mind that charging with a card can add about 20 percent to the total cost of an item because of the interest on plastic. 

“We wanted rules that were resonant and intelligible, that spoke to them and that they could understand at a snap,” said lead author Brett Theodos, who noted the researchers started with a long list of about 60 rules before whittling them down to just two. “These are two good, defensible, compelling rules.”

The Urban Institute, a public policy research group, tested the rules on almost 14,000 people who use Arizona Federal Credit Union’s credit card. While a control group received neither of the messages, the remainder received at least one of the messages in at least one of three ways: through an email, through online web banners, and through a physical reminder, such as a fridge magnet.

The customers who were reminded of the $20 rule ending up with debt that was $104 lower after six months, or a decrease of about 2 percent, the researchers found.

The 20 percent added didn’t have a significant impact on the group as a whole, but it was effective with people under the age of 40. That younger demographic had $160 less in revolving debt after the test.

“It’s not huge in some ways, but since it cost 50 cents per person to make these rules, and it results in a $100 in reduction, it’s highly cost effective,” Theodos said.

The study was completed in partnership with D2D fund and funded by the federal Consumer Financial Production Bureau. 

Theodos said he views the study as a first step in researching how to help consumers make good financial decisions by testing additional rules. With the proliferation of online services such as Mint, a budgeting program, as well as the opportunity to opt into texts from banks and credit cards that remind customers about due dates and bills, the financial services industry is increasingly moving toward online reminders.

“It’s important to get the rules right so they are helpful and unbiased,” he said. Reminding consumers through such nudges is “in some sense the wave of the future.”