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Do the minimum payments on your credit card trick you into paying less than you would otherwise?

Eric Barker
April 30, 2010

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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Post Information
Title Do the minimum payments on your credit card trick you into paying less than you would otherwise?
Author Eric Barker
Date April 30, 2010 9:25 AM UTC (13 years ago)
Blog bakadesuyo
Archive Link https://theredarchive.com/blog/bakadesuyo/do-the-minimum-payments-on-your-credit-card-trick.17230
https://theredarchive.com/blog/17230
Original Link https://www.bakadesuyo.com/2010/04/do-the-minimum-payments-on-your-credit-card-t/
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