The Cost of Anchoring on Credit-Card Minimum Repayments
The Cost of Anchoring on Credit-Card Minimum Repayments
7 July, 2020 •Similar Articles
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About three quarters of credit card accounts attract interest charges. In the US, credit card debt is $951.7 billion of a total of $2,539.7 billion of consumer credit. In the UK, credit card debt is £55.1 billion of £174.4 billion of consumer credit. The 2005 US Bankruptcy Abuse Prevention and Consumer Protection Act and the 2003 UK Treasury Select Committee’s report require lenders to collect a minimum payment of at least the interest accrued each month. Thus people are protected from the effects of compounding interest. But including minimum payment information has an unintended negative effect, because minimum payments act as psychological anchors. In anchoring, arbitrary and irrelevant numbers 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). Consistent with this hypothesis I find a strong correlation between minimum payment size and actual repayment size in a survey of credit card payments. A subsequent experiment demonstrates a causal link.