There might be a simple way to help yourself eliminate late credit card payments and boost your credit score: Set up automated credit score updates.
Credit card debt is one of the most expensive consumer debts to carry, with the current average interest rate hitting 17.76%, according to CreditCards.com, the highest ever. Consumers also routinely miss making their minimum payments on time, and then owe more once a late payment fee is tacked on to their bill. A late payment can also increase a consumer's interest rate while reducing their credit score.
But a working paper from the National Bureau of Economic Research released this month finds that even something as simple as opening an email can have a positive influence on financial behavior. In the experiment, participants in the "treatment" group were sent an email telling them they could view their FICO score for free on Sallie Mae's website, while members of the control group were not sent emails but were told that they could access their scores for free.
After one year of quarterly updates, the researchers found that those who received the nudge emails were 0.7 percentage points less likely to be past due on an account by 30 days or more, 4% less than the control group. Though it might not seem like that much of a difference, the researchers deemed it "significant."
"This change in payment behavior is quite large, especially given that less than half of treatment group members ever opened the email and an even smaller fraction ever logged in to view their score," they write.
The nudge also led to a "statistically significant" improvement in members of the treatment group's credit scores. Those who took the extra step of actually viewing their FICO score from the email prompt were estimated to see a credit score increase of 8.2 points, on average.
That's important because a higher credit score can lead to lower interest rates on products like auto loans and mortgages, access to better rewards credit cards and even a better apartment.
"Nudging" as a financial concept was introduced by legal scholar Cass Sunstein and Pulitzer Prize-winning economist Richard Thaler, who argued that humans are not completely rational beings. Though we know we should follow certain behaviors — say, save for an emergency or pay off our credit card bill — we often need to be "nudged" to actually follow through.
Thaler's research is why many employers today automatically enroll their employees in a 401(k) program, rather than leave it to employees to opt in. This change nearly doubles 401(k) participation among new hires, according to Vanguard. (However, many people should still be saving even more.)
The NBER researchers note that their study points to the importance of small, low-cost individualized actions when it comes to positive financial behavior. This type of automation is an easy way to stay on top of financial tasks in general, ranging from saving to investing to bill pay.
You can typically set up daily, weekly or monthly reminders for bill payments or credit score updates via your bank or credit card issuer's website, either by text, email or both. They take less than five minutes to set up, and could save you some money and boost your credit score in the long run.
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