Have you ever felt overwhelmed trying to decide which credit card to pay off, whether to open a student loan, or where to invest your savings? Our new study funded by the Consumer Financial Protection Bureau shows that simple rules of thumb, even if they’re not as detailed as other forms of financial education, might help people improve their financial decisionmaking.
Financial decisions can be complex, and the wrong choices can lead to long-term financial strain. This complexity makes financial education difficult to deliver. Many studies have found that financial literacy classes in high schools, community colleges, and adult education spaces don’t do much to improve financial outcomes for participants. More intense one-on-one methods of financial education and behavior change, such as counseling and coaching, have shown promise, but it’s difficult to get people to participate in these time-intensive programs, and they can be expensive to administer. It turns out simple rules of thumb can help at a very low cost.
To measure the effect rules of thumb can have, our team, in partnership with D2D Fund and Arizona Federal Credit Union, created two simple rules for better credit card usage and sent them randomly to almost 13,000 members of the Arizona Federal Credit Union (1,744 of whom were in the control group and received no rule). We targeted members who carried debt on their credit card from month to month, and the rules were meant to help them reduce this debt by spending less.
The rules we created were as follows:
- The cash under $20 rule: "Don’t swipe the small stuff. Use cash when it’s under $20."
- The 20 percent added rule: "Credit keeps charging. It adds approximately 20% to the total."
Arizona Federal Credit Union sent these rules to participants via e-mail, online banners, and calendar magnets over six months. We then examined participants’ behaviors and outcomes and compared them with a control group that received no rules of thumb messaging. D2D Fund also used the lessons we learned to create a toolkit that can be used to create and test new rules of thumb.
- This study demonstrates that rules of thumb can be a cost-effective method of financial improvement and behavior change. The rules helped reduce participants’ credit card balances by an average of 1 to 2 percent compared with the control group, while costing just $0.50 per person.
- The rules tended to work better for participants under age 40. Participants under 40 who were exposed to either rule had lower credit card balances and made fewer purchases on their credit cards during the study than their control group counterparts. Those under 40 who received the cash under $20 rule also had higher savings and higher net savings (savings minus credit card balance). Participants in this age group also made slightly fewer credit card payments than they would have made without treatment, perhaps because they had lower balances and therefore needed to pay less frequently.
- Generally, the participants in our sample were not frequent users of their Arizona Federal credit cards, but effects were stronger for the participants who made more purchases at baseline. This suggests the rules would likely have had larger effects for a population of more active credit card users.
- There was no clear winner in terms of delivery mode (e-mail, online, or physical mailer), although receiving the rule via fewer channels seemed to work better than receiving it via all three. Just as you tune out that billboard that you’ve already seen as a TV and radio advertisement, overexposure to the rules may have made them less compelling to the participants.
- The rules we created and tested are only an example of what the impact of rules of thumb might be. In an age when your electronics know your location and Google knows you better than your spouse, tips, rules, nudges, and reminders are destined to become more and more prevalent in our financial lives. Lenders are already using these strategies, as are personal financial management platforms such as Mint.com. But it is not only the big players that will communicate with us in these ways—the potential for mobile-based apps is limited only by our collective imagination (and fatigue). More research is needed to determine which rules are most effective and when, and to tease out the mechanisms behind the effects.