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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
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