December 2011

A bill with a minimum payment of $20.00, and the corner of a $20 bill.

Card Minimums Cause Puzzling Behavior

What is it about the minimum payment on credit card statements that makes people act so crazy?

Two years ago, Neil Stewart, a psychologist at the University of Warwick in the United Kingdom, confirmed his own and some behavioral economists’ suspicions: when the minimum payment line was entirely deleted from statements, cardholders paid 70 percent more.

The holiday shopping season is in full swing, underscoring how important this initial finding was. Credit-card companies set their minimum payments extremely low, significantly increasing customers’ total payouts over the long term – paying the minimum causes interest costs to accumulate faster.

Stewart and his colleagues have now advanced his prior research by testing how card-carrying Americans and British would react to different levels of minimum payments. The result this time: the higher the minimum, the less people paid.

“We’re not entirely sure what’s going on in people’s heads,” said co-author Linda Salisbury, a professor in the Carroll School of Management at Boston College. The key, however, is a well-known psychological concept called “anchoring,” she said. …Learn More

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