New research finds that credit-card holders pay down their debts more slowly when their statements suggest a minimum monthly installment. The Economist reports on the study, by University of Warwick psychologist Dr. Neil Stewart:
Mr. Stewart presented 413 people with mock credit-card bills of ?435.76 (about $650) that were identical — except that only half mentioned a minimum payment of ?5.42. Participants were asked how much they would pay.
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 percent less on average when presented with a minimum payment. In the real world, this would roughly double interest charges.
It turns out that, for those inclined to pay their debt bit by bit, the monthly minimum acts as a mental anchor, exerting an enormous amount of influence on how quickly that debt gets paid.
Stewart found that as suggested minimums drop, actual payments fall right along with them, even among people who pay above that bottom limit.
So the minimum payment can be a helpful tool for card holders. It gives them a guide on how much money to pay to keep their debt from exploding under compound interest. But it’s a much better deal for the companies that issue the cards.
Say you’re a credit card company. You make money every time one of your card holders carries a balance at the end of the month, because you charge interest on that debt. A lot of interest. The longer your card holder carries debt, the more money you make.
But if that debt tips out of control, and the card holder defaults, you lose everything.
So you want to find a middle road, a strategy that will keep your card holder’s debt manageable, but that will stretch out repayment as far into the future as possible, maximizing your profits.
Considering Stewart’s findings (paper available here), minimum monthly payments seem like the most surefire way down that middle path.
and 
. You can also watch it on 
I think that study is very flawed. I mean, it doesn’t take into account people’s situations as to why they might pay the minimum amount.
In our blossoming economy(sarcasm), its hard to pay much more than the $12 minimum payment when you only collect $750/month on unemployment.
So minimum payments act as a set point as behavioral theory predicts. The real question is the extent to which the card companies have – fiendishly, as the headline suggests – tested minimum payment levels.
I agree with Poster #9. I would like to know what instructions the participants were given when they were asked to decide what their payment would be. My decision would depend completely upon my total financial situation and how much cash I had available. I would certainly pay a lot more if I had $50,000 available instead of $1,000 – common sense. More info about this study is needed.
I always find it amusing how people complain about banks charging fees to “access their own money”. do people forget that a bank is a BUSINESS designed to maximise returns for its shareholders?
It makes perfect sense to do as the paper suggests – keep peole holding their balances as long as possible and therefore maximising profits. And people who think banks are evil are just nieve.
Credit card companies are a tool, and should be used as such – if you don’t like paying for the service, don’t use it.
Poster #6,
That ‘debt slavery’ you allude to, is of their own making.
I’m not surprised by the results of the study. In college I did the usual, got a credit card thinking I’d have to start somewhere to get a credit record. I usually just paid the minimum, but once I looked to see how long it would take me to pay it off (nothing exorbitant there), I started to see how much money I was flushing down the tubes. After really cracking down on our finances my husband and I are only 2 years away from paying off the mortgage (the last of our debt) and saving more in interest than our property cost in the first place.
if there is no minimum payment isn’t the rational action to pay nothing. who cares how large the debt grows if you never have to make a payment.
Now what I do is pay at least double or triple the minimum when I can. It’s called beating the odds. And I love beets, beats, bets and dancing) The debtors don’t expect it. Who benefits long term? Let the seller beware!