Do the minimum payments on your credit card trick you into paying less than you would otherwise?
The 2005 U.S. Bankruptcy Abuse Prevention and Consumer Protection Act and the 2003 United Kingdom Treasury Select Committee's report require lenders to collect a minimum payment of at least the interest accrued each month. Thus, people are protected from the effects of compounding interest. However, including minimum-payment information has an unintended negative effect, because minimum payments act as psychological anchors.
In anchoring, arbitrary and irrelevant numbers bias people's judgments (Tversky & Kahneman, 1974) and decisions (Ariely, Lowenstein, & Prelec, 2003), even when participants know that anchors are random or implausible (Chapman & Johnson, 1994). Meaningful anchors also bias judgments (e.g., Mussweiler & Strack, 2000). If decisions about credit-card repayments are anchored upon minimum-payment information, then people will repay less than they otherwise would and incur greater interest charges (Thaler & Sunstein, 2008, independently made the same suggestion). Consistent with this hypothesis, I found a strong correlation between minimum payment size and actual repayment size in a survey of credit-card payments.
Source: "The Cost of Anchoring on Credit-Card Minimum Payments" from Department of Psychology, University of Warwick
If you want to learn more about credit cards and debt watch this, this and this.
I want stories. Tell me credit card stories. Post a comment.
How to quickly and easily improve your life
Consumer Reports - List of the best credit cards (good terms, no fees)
What has the recession done to Americans' odds of bankruptcy?
Are people who owe money fatter than people who don't?
You should follow me on Twitter here or subscribe to this blog's feed. If you're a regular reader please support the blog by doing your book and movie shopping at the store. You'll find all my recommendations there. Here are the site's most popular posts of all time.
