Credit Card Payments and Psychological "Anchoring"
How much do you pay per month on your credit card balance(s)? The minimum suggested? The full balance? Somewhere in between? Does the "suggested minimum" payment (a legal requirement) have an effect?
It may not seem so, but psychologists have determined that those minimum payment numbers may cause card holders to pay less than they normally would if a number wasn't suggested. From the Economist:
Mr Stewart presented 413 people with mock credit-card bills of £435.76 (about $650) that were identical--except that only half mentioned a minimum payment of £5.42. Participants were asked how much they would pay.Among those inclined to pay the bill in full, the presence of the minimum payment hardly made any difference. However, those who wanted to pay just part of it handed over 43% less on average when presented with a minimum payment. In the real world, this would roughly double interest charges.
I for one am more well-intentioned about paying off my bill every month than I am successful at it. But I always try to pay the max I can afford, regardless of the suggestion. I also try not to use my credit card very often. "Balance-sheet solvent" is a good place to be these days, considering how long that line for government bailout money is at this point.
I always pay mine off in full. In the early days of using a credit card, I kept a running total and never spent any money I did not actually have. (These days one can generally get the current built-up total via phone and/or web, making this a lot easier.)
The polite term for me is "convenience user". The industry term—despite the fact that the card company makes money off the merchant fees—is "deadbeat". :-)
December 16, 2008 3:50 AM | Reply | Permalink
It's Orwellian that you're the "deadbeat" in that scenario and the guy with 12 credit cards and a $50k balance (but who still manages to pay the "minimum"!) is the coveted customer. Makes sense for them, but I remember being so confused by that concept when my mom - who practices the same discipline as you do - would explain that to me when I was little.
December 16, 2008 7:49 AM | Reply | Permalink
I pay mine off every month. I only use credit cards to manage cash flow during the last week of the month and the first week of the following month.
December 16, 2008 10:39 AM | Reply | Permalink
Very interesting. So a concrete proposal for credit card regulation is changing the wording to something less inviting? For instance: "Minimum Payment, will not reduce overall debt"
I got hoodwinked by a home equity loan for two months. I paid the "minimum" and when I finally got around to entering the loan in Quicken discovered to my horror that the minimum was ONLY the interest. I muttered "there ought to be a law"... and there ought to be one that requires that the minimum includes a pay down on principal.
December 16, 2008 10:54 AM | Reply | Permalink
Serious Question: Is there any other business on the face of the earth that treats its customers AS POORLY as Credit Card companies? Short of Mrs. Lovett's meat pies, I'd say absolutely not.
Dear Credit Card companies,
1) You will fold up once people realize how badly they've been mistreated by you. Congratulations.
2) In the meantime, go to hell.
For the record: I've never had a Credit Card, and never will. Only student loans, and 2 small loans. I've paid them all off. [Dave Ramsey Baby! www.daveramsey.com]
December 16, 2008 11:45 AM | Reply | Permalink
I assume anyone who reads TPM could figure out the consequences of only paying minimum payments on their credit cards. If given a calculator they could figure it out to the penny.
But not everybody reads TPM, or understands compound interest charges.
December 16, 2008 2:34 PM | Reply | Permalink
IMHO, intelligence is no indicator of financial responsibility. There's a pyshcology at work when it comes to credit, and payments over time, and over/under estimatihng our abilities. There's a lot of self-deception going on when it comes to balancing wants and means.
December 16, 2008 5:03 PM | Reply | Permalink
The study appears to be poorly designed. Are they assuming this is the only bill the person receives? Also, what proof do they have that the people who claim to pay their bills in full actually do - I think alot of people lie about this - just like people who say they eat fruits & veggie, but actually live on McHeartAttacks.
December 16, 2008 4:26 PM | Reply | Permalink
In general I think credit card companies need to die ESPECIALLY American Express who hosed most of their customers in order to get bailout money.
http://www.talkingpointsmemo.com/talk/blogs/burnedoutdem/2008/11/i-hope-american-express-shrive.php
I do, however, have one store card that I think should be a model either for other store cards or for credit in general (wishful thinking but here it is):
This privately held midwestern dept. store has a NO INTEREST, NO FEES, NO LIMIT card. Yup, that's right. But, the catch is they bill you in such a way that you should have your balance paid in 4-5 months (I don't remember which it is). So, if you rack up $500 in purchases, be prepared for a minimum payment of $100. If you charge anything else the following month the minimum resets to 1/5 of your total balance.
They're pretty strict about it and each bill comes with a grid that explains what your minimum payment will look like if you run up your balance.
Personally, I think it's brilliant - you think twice about buying things because it's not a question of, "am I near my limit?" but "can I make that payment?"
I've begun to apply that principle to my other cards and it really does change how you view your available balance.
December 17, 2008 9:20 AM | Reply | Permalink
It is already a widely known fact that people who use credit cards spend significantly more than if they paid cash. People who sign a contract they have never read, only to get it in the mail later and then if they do read it don't understand it, are not practicing any kind of personal responsibility from the get go. This is especially true when it is widely known that these contracts are abusive.
It continues to amaze me in the midst of all this evidence that it is clearly foolish to use a credit card, or even have an open account with a credit card company, that people continue to try to justify why it is a necessity while claiming to be a victim of the credit card company. Do you want to fix the problem - STOP USING THEM and CLOSE ALL CREDIT CARD ACCOUNTS!! Period. Make intelligent choices and the free market will eliminate the abuse.
Stop making arguments for the less educated, and claim that you can con the con artists by paying the balance off every month. It is YOU who is being conned. Don't you realize they are still enabling you in finanical irresponsibility? The regulators are implementing a new rule that will start in 2010 that limits credit card companies in their abusive terms. However, they are stiffing all customers now with abusively high interest rate increases for no good reason except that they need the money and they can take it cause they want to, today. It is a long way to 2010, you can bet that legislators will head it off before 2010, but in the meantime make everyone feel like they are going to finally listen to the people who elected them. Don't count on it. They are just going to find new ways to bilk credit card holders, even the ones who pay the balance every month. You can count on that. Why? Because it is the lobbyists in the financial sector that get most legislators elected. Even Chris Dodd. Check it out on http://www.opensecrets.org
Jim
http://www.thetruthaboutcredit.com
http://www.howtolivedebtfreebook.com
December 19, 2008 12:17 AM | Reply | Permalink
I would ordinary agree that people should use the brains they were born with instead of spreading around the blame. But in this culture, where you're going to be alone, ugly and childless unless you buy xyz handcream or never get any chicks unless you buy abc aftershave, or that your life has no meaning unless you can afford the luxury auto, one must take into consideration the social psychology of all this.
I've heard mommies tell their two year olds: oooh look jimmy, that's a *maserati.* not, oooh look jimmy, that's a sparrow. And that's a cardinal. We need to cut ourselves a break sometimes. It shouldn't be THAT easy to screw each other over.
January 5, 2009 2:25 PM | Reply | Permalink
I've found a useful arrangement with my credit union. I have $1000 limit Visa card that I put $750 into and they $250. If I wish to increase the limit, I just ante up the 3/4 of the limit. So a $4000 limit would cost me $3000. And if I decide I don't need the card anymore, I just pay them their stake and take the loss or pay off the account and pocket my stake. I prefer this arrangement. Much easier to control personal spending.
January 9, 2009 2:28 PM | Reply | Permalink
What has happened to this blog? is it dead? it has been quite a while since we've had any new blog posts.
Beetlejuice,
If you read the credit card agreement and understand the legal implications in it, you would not prefer any arrangement with any kind of credit card. Only those that think they are smarter than the high paid staff of attorneys that write these agreements will keep their cards, but they are deluding themselves. Unfortunately, some pretty intelligent financial advisors still think they are taking advantage of their credit card company - all the while the credit card company is laughing all the way to their own bank and these guys are clueless. Fortunately, there are people who are getting a clue and are simply closing their accounts.
January 27, 2009 10:04 PM | Reply | Permalink