aTypical Joe: a gay New Yorker living in the rural South

Tuesday, July 17, 2007

An opt-out payment plan for credit cards

Professor Michael Barr of the University of Michigan, guest blogging at Credit Slips, floats an idea:

What if credit card companies were required to use an “opt-out payment plan” for credit cards, under which consumers would be required automatically to make at least the minimum payment necessary to pay off their existing balance in its entirety over a relatively short period of time (say 6 months) unless the cutomer affirmatively opted-out of such a payment plan and chose a longer payment term.

Given what we know about default rules and framing, such a payment plan may be easier to follow, resulting in lower rates of delinquency and default. In any event, an optimal payment plan may encourage card holders to alter their borrowing behavior or their payoff plans.  Moreover, credit card companies might find it difficult to argue publicly against reasonable opt-out payment plans and, in the face of such plans, to maintain a pricing model based on borrowers going into financial distress.

I should read more but my gut says too many of us would opt-out. Still, it’s a good idea and it would probably help a statistically impressive bunch of us.