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Credit card issuers should employ "libertarian paternalism" to help consumers make smart choices at moments of critical decisions about credit, says Sarah Rosen Wartell, executive vice president of the Center for American Progress. Rosen spoke as part of a panel at the third annual Financial Literacy Summit hosted at the Chicago Federal Reserve yesterday by the Chicago Fed and Visa Inc. "Traditional economic theory says that human beings are rational actors," Rosen Wartell said. "Behavioral economics tells us that people are human, and humans do not always behave as rational economic actors." She referred to the theories of University of Chicago business professor Richard Thaler and former University of Chicago law professor Cass Sunstein, detailed in their book Nudge: Improving Decisions about Health, Wealth and Happiness. Just as mortgage issuers can help applicants avoid exotic mortgages by defaulting them into safer, 30-year, fixed-rate terms, card issuers can help cardholders pay off revolving balances sooner by setting default minimum payments to higher levels than those now required by most issuers, Rosen Wartell said. Cardholders could opt for lower minimum payments, but the extra step might discourage them from making that change. Rosen Wartell also suggested issuers provide cardholders with data to help them avoid costly credit mistakes during critical decision-making moments. Such notices could include alerts sent to cardholders' mobile phones that warn not only that they are nearing their credit limits but also reminding them that exceeding credit ceilings could increase their cards' interest rates.
