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Your Minimum Payments Influence Your Debt Repayment

“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.

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Miranda November 12, 2008 at 8:43 am

You’ve hit the nail on the head. The whole point is to have us be in JUST enough debt that we can keep making payments (the longer we’re making them, the better), without tipping us over the edge. Indeed, that’s what our entire economy has been build upon: consumers being in debt. Unfortunately, we’re finding out that such a model may not be sustainable in the long run, because eventually a tipping point is reached.

Michael November 12, 2008 at 3:34 pm

Others set our expectations with numbers so easily…

chica with issues November 12, 2008 at 4:47 pm

wow, interesting experiment.

Dad November 12, 2008 at 10:47 pm

Credit cards are good only for people who can management responsibly for their own good. They can be a great convenience. But they can be a great temptation. People who get debt counselling are often told to cut up all their cards because they have demonstrated that they can’t handle them. That may be extreme but it may be the best answer for many people. If you have a credit card you need a plan for what you are going to do with it. Will you use it frequently or will you use it only for certain things? In most cases, you should plan on paying it off every month. There may be exceptions to that but I would examines these ‘exceptions’ with great suspicion and get advice from someone you respect in financial matters before you make that decision. I use my rather frequently for many kinds of purchases but I keep an idea on how much the balance is running and I work to be sure I’m not spending just because the card makes it easy. The ease of overspending is rather dangerous. Can you handle that? I also check the balance and transactions frequently to be sure I’m within budget. I am very careful not to buy what I hadn’t already decided I was going to spend and which is already in my budget. Your plan or regimen may be different but you need one, you need to stick with it and it must fit you means and your budget.

Kate November 15, 2008 at 2:06 pm

I have never been more glad that I do not use my CC that often. Off hand (and this may be a dumb question) do you know if the same theory applies to student loans or car loans. I would tend to think not with the car loan, because that is a secured debt, but I may be wrong.

Also, why is it that the mental manipulations by the credit card companies are not considered predatory lending?

mrsmicah November 15, 2008 at 2:56 pm

@Kate, I think it probably has some affect on how people repay fixed loans, but it’s probably not as strong. Credit card interest is higher and payback period is infinite. Whereas with other loans people have a slightly better idea of the time frame and payment structure.

I think it’s not predatory because it is necessary for them to set a minimum payment (or no one would pay it back). That’s a similarity that credit cards have to any other loans. They just stand to profit more from lower payments because people are always paying it off.

poor boomer November 15, 2008 at 10:44 pm

My minimum income influences my debt repayment.

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