Anchoring Minimums
Everyone pretty well accepts the fact that credit card minimum payments are meant to keep you in debt for as long as possible so that credit card companies can make loads and loads of profit from interest charges. But did you know that by putting a minimum payment on your credit card bill, the credit card company is virtually guaranteeing that you’ll pay less?
Yup, once again, you’ve been had. Sure you knew they were screwing with your wallet, but you should be furious to find out they’re also screwing with your head.
Dr Neil Stewart, a psychology researcher at the University of Warwick in Coventry, England connected the phenomenon of “anchoring” to credit card payments.
According to Dr. Stewart:
“In anchoring, arbitrary and irrelevant numbers bias people’s judgments and decisions, even when participants know that anchors are random or implausible.”
In other words, just because a number is there, even if that number has no meaning to us, it will affect our decision-making.
The good doctor found that the minimum payment amount stated on credit card statements acts as an anchor – think “new base level” — lowering the payments people make. These aren’t people who are paying only the minimum. These are people who are trying to get their debt paid off faster by paying more. That minimum payment box is like an anchor around their necks.
Two test groups were given credit card bills with $700 balances. The first group had no minimum payment amount listed. The second did. On average the first group paid $280 off, the equivalent of 40% of the balance. The second group paid an average of $161, or 23% of their balance.
Anchoring extends the length of time it takes for people to pay off their credit card debt because the lower the required minimum payment on the statement, the lower the actual payments, regardless of the borrower’s desire to get out of debt!
Dr. Stewart has been quoted in the media as saying:
“These results should be of real concern to credit card companies. Virtually all credit card statements include minimum payments. But this consumer safeguard has an unexpected negative consequence: Minimum payments distort the behaviour of many customers in a way that increases interest charges and increases the duration of their debt.”
M’thinks the doctor is either incredibly naïve or he’s got his tongue firmly in his cheek. Concerned indeed. No doubt the credit card companies have known for years just how effective their minimum payment strategy is in keeping borrowers on the hook. They know a whole lot more about us than we think.
An article in the New York Times provided a glimpse into just what our credit card companies know about us. For example, did you know that Canadian Tire cardholders who used their credit cards in drinking places missed four payments within the next 12 months? They do. And while the article focuses on the fact that today’s credit card companies are focusing on those customers most likely to honor their debts, no doubt any tactic that will keep customers on the hook longer and make ‘em more profitable will be an advantage.
Want to stop the credit card company from messin’ with your mind? Get yourself on a debt repayment plan of your own making and stick with it. The only thing the minimum payment amount is good for is to keep your account in good standing while you focus on paying off your most expensive debt first. If you’re using that minimum amount as a guide for how much to pay, even if you’re paying more than the minimum you’re a sucker.