Credit Card Psychology

Research to be published by Dr. Neil Stewart of the Warwick Psychology department suggests that the presence of required minimum payments on credit card bills encourages people to pay off less of their debt.

Stewart’s study found that people tended to ‘anchor’ their monthly repayments around the minimum payment, the lowest amount that a card holder must repay each month, instead of the total debt. This means that in the long term, they end up paying the card companies more as the debt takes longer to repay.

In a study of 248 credit card bills, he found that 58% had paid off the total debt, 7% paid only the minimum amount and 36% opted for a value between the two. That 36%, Stewart contended, were at risk of being swayed by the presence of minimum payments.

By conducting an experiment of 413 individuals, he found that of the 36% that pay off less that the full amount of their debt per month, those presented with a set minimum would pay back an average 70% less than those who were not.

Regulations that have come into force this month require credit card companies to print warnings on the monthly bill advising of the dangers of only paying off the minimum amount. Stewart noted however that a printed warning “does not warn people about anchoring [payments]”.

He suggested that more information for customers about the cost of repayments is crucial, arguing that it will help them to avoid basing repayments around the minimum.