Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Research finds customers’ fixation on minimum payments drives up credit card bills

06.10.2008
New research by the University of Warwick reveals that many credit card customers become fixated on the level of minimum payments given on credit card bills. The mere presence of a minimum payment is enough to reduce the actual amount many people choose to pay on their bills, leading to further interest payments.

The research, by University of Warwick Psychology researcher Dr Neil Stewart, is to be published in Psychological Science, in a paper entitled “The Cost of Anchoring on Credit Card Minimum Payments”. It focuses on the psychological phenomenon of “anchoring” in which arbitrary and irrelevant numbers bias people's judgments.

The research reveals that anchoring affects the way people repay their credit card bills. For those people who make only partial repayments of the outstanding balance (about 35% 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.

Dr Stewart said: “These results should be of real concern to credit card companies. Virtually all credit card statements include minimum payments. But this consumer safeguard has an unexpected negative consequence: Minimum payments distort the behavior of many customers in a way that increases interest charges and increases the duration of their debt. Those paying off the balance in full each month seem to be immune, but anyone repaying only part of the debt is at risk not just those making only the minimum payment." Dr Stewart conducted two studies. A survey looked at repayments data and suggested minimum repayments from 248 real credit card bills. He found that the card owners split into three broad categories. The first group (58% in this case) repaid their bill in full. This group of people were not influenced in any way by the suggested minimum payment level. No matter how high or low the suggested minimum payment was they repaid their bill in full. A second group (7%) paid only the minimum payment. But it is the third group, those making payments above the suggested minimum but not enough to clear the balance (36%), who were affected by minimum payments.

Because respondents had credit cards from a variety of different providers, the level of minimum payment requested varied from person to person. Dr Stewart found that the level of repayment actually made by these card holders was closely correlated with the level of required minimum payment. The lower the required minimum payment the lower the actual payment made.

To examine whether minimum payments actually cause lower repayments, Dr Stewart conducted an experiment where some people received normal statements and others received statements with no minimum payment information. The experiment recruited 413 volunteers (54% female 46% male, with an age range of 18-68). Half were given mock credit card bills for £435.76 with a suggested minimum payment, and half the same level bill but without a suggested minimum payment. All were asked to imagine that the bill had arrived that morning and to decide, thinking about their current finances, how much they could afford to repay.

Once again the results found that the minimum payment had almost no affect on those who choose to pay their bills in full. 55% of those with minimum payments on their statement paid the bill in full. The same proportion of those without minimum payments on their statement paid the bill in full. However, the presence of a minimum payment had a large effect on those who chose to pay less than the full amount. When a suggested minimum payment was given the average repayment made by those not repaying the full amount plummeted 70% to just £99 on average (23% of the balance). Those not given any required minimum payment paid an average of £175 – 40% of the balance. Dr Stewart has calculated that, based on these data, minimum payment information could double the interest charged over the lifetime of the debt.

Dr Stewart explained, "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."

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."

Peter Dunn | alfa
Further information:
http://www.warwick.ac.uk

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

Im Focus: MADMAX: Max Planck Institute for Physics takes up axion research

The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.

The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...

Im Focus: Molecules change shape when wet

Broadband rotational spectroscopy unravels structural reshaping of isolated molecules in the gas phase to accommodate water

In two recent publications in the Journal of Chemical Physics and in the Journal of Physical Chemistry Letters, researchers around Melanie Schnell from the Max...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

High-precision magnetic field sensing

05.12.2016 | Power and Electrical Engineering

Construction of practical quantum computers radically simplified

05.12.2016 | Information Technology

NASA's AIM observes early noctilucent ice clouds over Antarctica

05.12.2016 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>