Helping Consumers to Evaluate Annual Percentage Rates (APR) on Credit Cards

Abstract

To help consumers make informed decisions, regulators often impose disclosure requirements on financial institutions. However, disclosures may not be informative for consumers if they contain difficult-to-evaluate attributes, such as annual percentage rates (APRs). To improve a consumer’s ability to evaluate the relative attractiveness of products with difficult-to-evaluate attributes, evaluability theory suggests providing consumers with distributional information. Here, we tested whether credit card disclosures containing graphs of the distribution of APRs in the credit card market help consumers estimate the relative costs of credit and evaluate credit cards. In two studies, we found that consumers using standard credit card disclosures (without distributional information) underestimated the costs of credit card APRs relative to the market. We then built on the graph design literature to design different graphs for presenting distributional APR information. A comparison of the graphs we designed showed that a histogram was most successful at improving consumers’ estimates of APR costs relative to the market and modifying consumers’ evaluations of an expensive credit card. We discuss the implications of our findings for evaluability theory, graph design, and communication efforts that aim to provide consumers with meaningful financial disclosures.

Keywords: credit card, financial disclosure, general evaluability theory, graphs