“Anchoring” is brand loyalty, it’s our sense of what the norm should be. Credit card companies have discovered a way to create anchoring among customers in a way that earns them more interest. You see, the lower your minimum payment is, the less you (the average person) will think it’s reasonable to pay.
This doesn’t just mean the people who are content to make the minimum payment. It includes people who have decided to pay extra.
In a recent experiment, two sets of test groups received credit card bills with $700 balances. The first had no minimum payments listed, while the second included minumum payments.
The first group payed (on average) $280, or 40% of the balance. The second group, on the other hand, only paid an average of 23% of the balance, or $161. Because they’re paying more slowly, the second group will pay more interest over the term of the balance.
Of course the reason most credit card companies send out minimum balances is that they want to be repaid. Otherwise, what’s to stop you from running up balances on cards and just ignoring them?
And it makes sense that they would send out low balances. They want you to carry a balance as long as possible, so they don’t want you to be in any hurry to pay it off.
The anchoring? That’s a bonus for the companies. Even if people know they should pay more than their minimum, what seems like a reasonable payment is lower than if they’d come up with the number themselves.
Can we escape this type of anchoring? We can in at least one way–by paying off our entire balance every month.
Other ways include making extra payments based on a debt snowball or by debt snowflaking what you have that month. The first is based on your overall debt repayment plan (which takes the minimum payment into account only as a means of keeping up with your bill until you get to that step in your snowball). The second is based on what you have available to pay off extra debt.