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.