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

Research

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.

Anchoring was shown to occur, for example, when people were willing to pay more to dine at a restaurant called “Studio 97” than at one called “Studio 17.”  The mere presence of a number – evening a meaningless number – shapes decisions.  The minimum payment number on your card has a similar effect, and when that anchor is gone, people make their “own” decisions.  Salisbury said the anchoring effect may be conscious or subconscious.

The new experiments focused on cardholders’ reactions to minimum payments set at either 2 percent or 5 percent of the balance.  Researchers compared this to deleting the minimum payment line entirely.

Average payments were $876 when there was no minimum payment line.  They dropped to $695 for a 2 percent minimum and $536 for a 5 percent minimum.

Although their findings, published in the November issue of the Journal of Marketing Research, showed that cardholders overall paid less, responses actually depended on each individual’s historic payment behavior.  Nearly half of U.S. and U.K. cardholders carry a balance from month to month, and a significant minority of all cardholders – nearly 15 percent – pays just the minimum.

For people who usually paid more than the minimum, their payment dropped as the required minimum rose. But for those who always pay only the minimum, they paid more when the minimum was hiked to 5 percent. For them, the 5 percent payment “counteracts the downward anchoring” caused by the minimum payments line that is standard on U.S. card statements, Salisbury said.

Raising the minimum will “work for some people but for others it won’t,” she said.

Go figure.

One Response to Card Minimums Cause Puzzling Behavior

  1. Neil says:

    Another explanation is that cardholders expect the high minimum to continue in future months. They hold back on the amount of payment, as a reserve to ensure their ability to pay the minimum in future.