What Should I Pay You?

cardsI read a study by Neil Stewart about people making payments on their credit cards.  You can download it from this page – it’s the third one in the list, entitled, The cost of anchoring on credit card minimum payments.

It turns out that when minimum payments are indicated in credit card statements (like they usually are), things go pretty much as you’d expect:  very low balances have a higher proportionate minimum payment, so have a higher proportion of their debt paid; and higher balances, where the minimum payment becomes less and less of a fraction of the total debt, smaller and smaller payments get made.

I started my credit card days back in the 80s, believing the minimum payments were there to weed out total deadbeats, and then gradually wised up to the fact that the credit card companies would LOVE for you to just pay the minimum every month – by doing so, you’re just barely covering the interest and not putting much of a dent in the actual debt.  So that’s why I carry no balance on any credit card for more than a month when I can help it, and if I can’t pay the whole thing, I pay as much as I can afford, which is always more than the suggested minimum.  I think most people have this figured out.

Well this study shows that if you REMOVE the minimum payment requirement, and people are left to decide for themselves what to pay, the payments go UP in almost every case.  So people are getting themselves out of debt faster when the credit card company doesn’t suggest a minimum.  I’m no psychologist, but I would think the logic is something like this:  people naturally don’t like being in debt, so they do whatever they can (i.e. pay whatever they can afford) to get out of it.  But if your creditor says, “It’s OK, you can just send me this little amount – that’ll be cool.”  It makes you feel better about a smaller payment, because it’s still higher than the minimum.

I have no earth-shattering conclusion to draw from this, or any way that I can think of to tie it back to bar management.  I think it’s just one more proof that people are irrational, and that’s something marketers have to remember.

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2 Responses to “What Should I Pay You?”

  1. Derek K. Miller Says:

    Someone else must have noticed this by now, but I just did: why do all of your post titles start with W?

  2. Neil Says:

    Stephen,

    Cool blog. I’m not sure it was a deliberate ploy by credit card companies as
    they don’t know about anchoring! Seeing the minimum payment seems to drag
    down the amount you’d otherwise pay by acting as an anchor. There is no
    evidence of any conscious deliberation either. In fact recent evidence on
    anchoring suggests the opposite: Anchoring on numbers happens even if the
    number is purely incidental (e.g., how much you’d spend on a restaurant is
    lower if the restaurant is called Studio17 compared to Studio97) and even if
    you are warned about anchoring.

    Thank you very much for your interest.

    Best,
    Neil.


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