Low minimum credit card repayments push down repayments

Monday, 06 October 2008 02:00

The lower the minimum payment due on a credit card, the lower the actual repayment people make, according to new research.

A study by the University of Warwick reveals the presence of a minimum repayment level acts to reduce how much people pay back - and so extends the length of a debt.

The research by psychology researcher Dr Neil Stewart reveals the psychological phenomenon of 'anchoring', where arbitrary and irrelevant numbers bias people's judgments.

He found those people who make only partial repayments of the outstanding balance - about 35 per cent of card holders - the suggested minimum payment on the credit card statement acts as an anchor and lowers the actual repayments people choose to make.

Those with higher minimum repayments, and who don't stick with the minimum but pay off a partial amount, tend to make higher repayments.

Dr Stewart said: "Although minimum payments are a good idea in principle, because they protect the small number of people who would otherwise make no repayment at all, minimum payments do seem to have an adverse effect on those who repay only part of the bill, even those repaying a large fraction of the bill.

"From the psychology of anchoring, we know that people are less susceptible to its effects when they have greater knowledge. So helping people understand how much different possible repayments will cost them in the long term should help protect them from anchoring on minimum payments."

During experiments with volunteers, having a minimum payment led to 23 per cent deciding to pay a full bill, while no minimum payment led to 40 per cent paying a whole bill.

Dr Stewart added: "It is hard to estimate the cost of minimum payment information.

"For a particular individual the effect depends on their level of debt and on their repayments, and could be much larger or could be much smaller."

The study comes as new consumer legislation comes into force meaning credit card customers will be warned on bills the effect of paying just the minimum payment on the size of the debt.

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