Beware: Credit Card Minimum Payments Are Messing With Your Mind
Credit Card minimum payments are supposed to help keep the accumulation of interest on credit card debt from getting out of control — but a new study reported in the Economist suggests that minimum payments do more harm than good.
Mr Stewart was studying a phenomenon known as “anchoring”. Psychologists have found that being exposed to numbers, even irrelevant ones, can affect people’s decisions. For example, diners tend to spend more in a restaurant named “Café 97” than in one named “Café 17”. Since minimum payments on credit-card statements are usually small amounts, Mr Stewart wondered whether seeing an actual amount might make people pay less than they would otherwise have done. That is exactly what he found.
Here's the really interesting part. How much the small minimum amount affected the test subjects was dependent on their financial personalities. So, for example, if you are the sort of person who is inclined to pay your bill in full — seeing the minimum payment did not have a measurable effect.
But — for people who want to pay in installments — the small number really messed with their heads...
Among those inclined to pay the bill in full, the presence of the minimum payment hardly made any difference. However, those who wanted to pay just part of it handed over 43% less on average when presented with a minimum payment. In the real world, this would roughly double interest charges.
43% is a lot. For those of you with credit card debt — perhaps you should stop even looking at the minimum payment. You might find yourself out of debt a little quicker.
A nudge in the wrong direction [Economist via Freakonomics]
(Photo: Paxton Holley )
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I've always suspected the minimum payments are designed to keep you in debt forever. My rule of thumb is always pay at least 3-4 times the minimum payment, when paying in full isn't feasible. Of course as good Consumerists, we all always pay our credit card bills in full every month, right?
My card never has a "minimum" listed. Its always "statement balance" and when its due.
The minimum payment should be an option of last resort. It's only there for when you stop using the card because you can't affort to make any other purchases. The exception to that might be when the balance is so low that it hardly matters.
well if you pay the minimum payments you should be shot. The best idea if you can't pay the Credit card off is just to pay the minimum and the FINANCE CHARGES. If you set up your acct with auto pay do nont do not do just the min payment.
I work in a call center for some Local Banks that has some credit cards. So I know what i'm talking about.
Just my 2 cents- Can I have some change back?
I have noticed that the only credit cards I have that put the new balance total and the minimum payment amount on the remittance slip is Bank of America / FIA Card Services (formerly known as MBNA). Any other cards I have only have the minimum payment listed on the slip and I have to look a bit deeper to find the new balance total.
It's all a psychological thing and the banks know it. As evil as Bank of America is, they like to think they are morally better than everyone else for putting the new balance total more than one place on the statement.
@Oranges w/ Cheese: Lemme guess, AMEX? Or some other charge card (aka not a card you can carry a balance on)?
I once had a balance of something like $9 and the minimum payment was $40. Bass Ackwards, right?
@aerick79: I once worked on my car, so I know what I'm talking about. Don't forget to change your oil once every 80,000 miles, or before you sell it, whichever comes first.
My minimum payment is usually $0.00 unless I rack up more than about $500 in charges. I don't use this card too much (only where I can't use AmEx) but it makes it easier to only have to worry about paying every few months.
I guess I pay some interest but my rate is only 5.75% so it saves the hassle to have no minimum payment.
So basically, smart, responsible people aren't affected by random numbers, but dumbasses are susceptible? So if I open a restaurant, I should call it Cafe 9999999999999999999999999999999999999999 and expect huge tips?
I just thought of something. If credit card companies were required to put better information on the bill, it might encourage more responsible use. Of course, the credit cards don't want to do that.
I would suggest, as a minimum requirement, that payment numbers be added to the bill that reflect the payment that would have to be made to pay off the balance in 1, 2, or 3 years. The minimum payment would have the actual term in years and the total interest to be paid next to it. An educated public is an empowered public.
Is that what happened to Cafe 18 (on 18th and 5th in NYC). That place was great. And affordable :)
@B: agreed. I never know what my monthly minimum payment even is. I'd never consider paying anything less than the full amount, so I fall squarely into that "finacial personality" category according to the study.
They should have retitled this thread "How Awesome Are You at Paying Your Bills?"
It's going to turn into a Fico measuring contest.
I don't think people are really understanding the concept here. This study is not about how paying the minimum payment will keep you in debt longer (though it will of course). It's about how seeing that small number will change the amount you pay. So someone might be thinking he could afford to pay down about $500 this month. He sees that his minimum payment is $40. All of a sudden $285 sounds a lot more reasonable, when it had seemed low before. If there had been no minimum payment amount he would have paid the $500, now he pays $285 instead.
i'm in a financial place right now where i had to rack up my credit card for and emergency and can only make partial payments every month - but i stopped paying attention to the minimum balance and instead figured out a budget and set myself a payment that's the maximum i can pay and still feed/house myself and pay other bills. it's about 3 times the minimum payment that the bank requires but it's cut my interest in half.
@stevejust: sometimes in a tight month when i'm too lazy to time things out i'll pay the minimum right away, then the rest after everything else has been taken care of. never not paid the balance, but it could happen.
The Kookies box made me larf.
I'm glad to see some acknowledgment that different people handle things differently and that sweeping statements of statistics don't encompass everything there is know about people's financial behavior.
Since when is the minimum payment on credit cards "supposed to help keep the accumulation of interest on credit card debt from getting out of control"?
Fuck no. They are designed to maximize profit for the card issuers, nothing more. If it takes you 32 years to pay of a $1500 credit card debt, that means a slow trickle of money to the credit card company probably for the rest of your days. Hell, they've already minimized their exposure by securitizing your debt and selling it off to other investors.
Like the aliens in "War of the Worlds", the credit card companies are patient, lying dormant, biding their time. Asking for small monthly payments, willing to wait decades to cash in on all those outstanding balances earning interest.
I once spent $1,000 in a Vegas strip club, so I know what I'm talking about. The girls there actually do like you, not because of your money, but because of your personality.
@zigziggityzoo:
Naw, my AMEX card lists a minimum.
However, my card from FIA only lists the balance as being due on the stub you mail back to the bank. They still list a minimum payment, but it's buried in their statement.
@Parapraxis: What a coincidence, cause I like the girls because of their personality, too. Not because of their skilled plastic surgeons or their willingness to take their clothes off for money.
Not looking at the minimum is not going to help debt-ridden people get out of debt. They need to learn how to control their spending. They need to do the envelope budgeting system or something.
@aerick79:
My cards(Chase and local CU) calculate the minimum by taking 1% of my total balance+ total interest for that month.
I am lucky with my rates, 5.54% and 6.90%.
@B: It's still affecting you though. The idea is not necessarily to get you to pay the minimum, it's to get the minimum to affect your decision. That is, if there were no minimum, you would come up with a different number on your own.
However, with a minimum, you're using that as a measuring stick. Even if you pay 3 times the minimum, 3 * $50 is not the same as 3 * $100. So, if they lower the minimum, you might consider $150 a decent payment, when you otherwise might have paid no less than $300.
@B: I never looked into it, but I've always suspected that the minimum payment barely pays for the interest.
Personally no matter how much the minimum is I pay at least 20% if I owe a lot and a greater percent the less I owe
@Parapraxis: My wife forced me into watching the entire series of Ally McBeal so I know what I'm talking about when I talk about suing someone
@Tiber: I'm looking to a future credit card statement that has numbers scattered about pretty much everywhere to distract me from paying in full.
This is why you should make sure your kid gets A's in math!!!!!!!!!!!!
I have only ever payed the minimum when I had a true financial emergency. Otherwise, as much as I could reasonably pay.
@B: I once used a credit card for a loan once because I filed late for financial aid for summer classes and the check wasn't going to be there in time.
Put 1.5k on a credit card. I think the minimum payment was like 15 bucks. I remember being shocked at how low it was.
My girlfriend forced me to go see Celine Dion in concert, so I know what I'm talking about when I talk about seriously contemplating suicide.
It's the normalizing effect. If you see that $25 or whatever at the bottom of the statement pre-printed there, then it's institutionalized that "everyone" pays $25. If everyone does it and they're fine, why can't I?
For example, diners tend to spend more in a restaurant named "Café 97" than in one named "Café 17".
7-11 will now be changing their name to 89877-11999
Minimum payment should be the balance. If you don't have it. Don't spend it.
People are stupid to do anything else.
Right now I have a few K in CC debt. The wifey can't take home money right now because business sucks and I don't want to touch my reserves. I'm paying the minimum just to get through this time and then once things pick back up it will be time to pay it off again. Using the CCs for more of a line of credit than for stuff.
Every time I get my bill I look at the minimum payment and wonder who actually pays it. A $10 payment on an $800 bill? I pay in full every time and I've never thought to do otherwise. I'm no math genius but I think if you don't do that, you end up paying more! I suppose I fall into the category of "non-installment folk".
That might explain why Pier 1 is doing so poorly...
@chese79: yeah, it was stupid of me to have suddenly come down with a chronic illness last year and not have budgeted for hundreds of extra dollars a month in medications and doctor's appointments and need to take out a line of credit to keep myself alive. next time i won't do that.
but right now, the pharmacy needs paying.
while i can agree that putting the latest fancy electronics/clothes/etc on your credit card when you can't afford them isn't a move i would consider wise, i also wouldn't consider your blanket statement about stupidity to be a wise one.
My husband and I are in extreme debt. We have charged our heat bill, gas, food and medical expenses. So we are not fools buying jet skis or diamonds ring and wondering why we have no money. My husband works 70 hours a week, while I an out of work teacher is currently a stay at home mom. We make minimum payment on everything because that is all we can do. If we pay one cent less than the minimum the interest rate goes from 8% to 30% without skipping a beat.
Credit cards are cruel. We talk to customer service they treat you like a criminal. Like I want to be in debt. I am charging baby formula not buying a house or an iPhone I can not afford.
Who is going to bail my family out? no one
I've had a few instances where I've been paying the balance on a card every month, then I don't get a bill in the mail, and wind up with both a late fee and a finance charge the next month.
I suspect this is done on purpose by the bank.
Has anyone else had this experience?
@CorinneDauber: Except there's some good indication that it is in fact helpful for people to avoid looking at their minimum, because then it won't mislead them into paying lower than they would have otherwise. That's the point of the article--that such things unconsciously affect how some people deal with their debt, and they deal with it less well as a result. Remove an obstacle and they are, in fact, helped.
When I pay online the default selection is the minimum payment. I can say I've been tempted in the past but always select the full amount in the end.