Brain Teaser: Do Credit Card Minimum Payments Actually Cause People to Pay Less Each Month?

Filed in archive Credit on October 9, 2008

© Gaetan Lee

I love stuff like this. From ScienceDaily:

New research by the University of Warwick reveals that many credit card customers become fixated on the level of minimum payments given on credit card bills. The mere presence of a minimum payment is enough to reduce the actual amount many people choose to pay on their bills, leading to further interest payments.

The article goes on to talk about the required minimum payment being an "anchor" that makes people fixate on that number, even though the minimum payment amount is irrelevant to how much the card user can afford or how much s/he should pay on it that particular month (preferably all of it). The cardholder is then likely to pay less than s/he would have if the minimum payment didn't exist.

This is only true of those who choose to pay above the minimum payment; it doesn't suggest that people pay only the minimum payment even if they can afford more. It instead suggests that if you can't afford to pay off the whole bill, you'll pay less if a minimum payment is shown than you would if there was no minimum payment. Here's some more detail on how they carried out the experiment that came to this conclusion:

The experiment recruited 413 volunteers (54% female 46% male, with an age range of 18-68). Half were given mock credit card bills for £435.76 with a suggested minimum payment, and half the same level bill but without a suggested minimum payment. All were asked to imagine that the bill had arrived that morning and to decide, thinking about their current finances, how much they could afford to repay.

Once again the results found that the minimum payment had almost no affect on those who choose to pay their bills in full. 55% of those with minimum payments on their statement paid the bill in full. The same proportion of those without minimum payments on their statement paid the bill in full. However, the presence of a minimum payment had a large effect on those who chose to pay less than the full amount. When a suggested minimum payment was given the average repayment made by those not repaying the full amount plummeted 70% to just £99 on average (23% of the balance). Those not given any required minimum payment paid an average of £175 - 40% of the balance. Dr Stewart has calculated that, based on these data, minimum payment information could double the interest charged over the lifetime of the debt.

I find that fascinating; I wish I had taken up psychology in college. The only thing that makes me question the validity of the results is that it's a UK study, and everyone knows they're crazy over there.