How credit cards play with your mind

Social Scientist, Neil Steward, University of Warwick (Coventry, UK), has provided causal evidence that printing a minimum payment amount on a statement encourages smaller payments, and actually reduces the amount of payments made. 

Steward argues that including minimum-payment information has an unintended negative effect, because minimum payments act as psychological "anchors," allowing the credit card company to earn more interest over the life of the loan.

The psychological concept of anchoring refers to how arbitrary and irrelevant numbers can bias people's judgments (Tversky & Kahneman, 1974) and decisions (Ariely, Lowenstein, & Prelec, 2003), even when participants know that anchors are random or implausible (Chapman & Johnson, 1994).

Meaningful anchors also bias judgments (e.g., Mussweiler & Strack, 2000). If decisions about credit-card repayments are anchored upon minimum-payment information, then people will repay less than they otherwise would and incur greater interest charges (Thaler & Sunstein, 2008, independently made the same suggestion).

Stewart, N., "The Cost of Anchoring on Credit Card Minimum Payments," Psychological Science (forthcoming).

http://www.psychologicalscience.org/journals/ps/20_1_inpress/Stewart.pdf

Similar research has shown that some consumers perceive that interest rates expressed as whole numbers (ex. 8%) is less than interest rates expressed with decimal places (8.00%).  One study found that some perceived that 8% is a smaller number than 7.99%.

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