Published: May 8, 2020


Growing credit card debt can be a source of substantial financial difficulty for borrowers and their families. A new Life Course Centre Working Paper seeks to tackle this problem by testing whether a prize linked financial tool can incentivise credit card users to increase their minimum repayments.

For many, growing credit card debt may stem from the choice to make only the lowest possible, or minimum, repayment that satisfies their credit agreement each month. One reason borrowers may pay the minimum is they simply do not have the ability to repay more. However, borrowers may also be motivated by behavioural factors such as acting over-optimistically, ‘anchoring’ on the minimum, or not fully understanding the implications for debt accumulation when paying the minimum.

This paper investigates the capacity of the Prize Linked Debt (PLD) tool, using an online experiment with 858 participants, to increase debt repayments amongst those who make the minimum credit card repayment but are not constrained to doing so. PLD entails a prize threshold set above the minimum credit card repayment threshold. Borrowers can become eligible to win a prize with lottery-like odds by repaying on or above the prize threshold.

The online experiment evaluating the PLD finds that a prize threshold, set on average 37% above the minimum, increases payments by 31% amongst borrowers who repaid the minimum before being offered the PLD. The probability of repaying the minimum falls by 69.1% for this population.

These results suggest that prize-linked incentives could play a role in targeting consistent low debt repayment practices amongst credit card borrowers. PLD would be preferable to, for example, raising the minimum, as no cost is imposed on those who are unable to increase their repayments.

This Working Paper is authored by Patrick Hendy, a recent economics honours graduate from the University of Sydney who was awarded First Class Honours and the University Medal, in conjunction with Professor Robert Slonim and Associate Professor Kadir Atalayof the University of Sydney. Professor Slonin and Associate Professor Atalay are both Research Fellows at the Life Course Centre. The paper is based on Patrick Hendy’s honours thesis, which was supported by a Life Course Centre Scholarship for Research Addressing Social and Economic Disadvantage.

You can read the full Working Paper, ‘Prize linked debt: Increasing credit card repayments in an online experiment’, here.