Minimum Payment Information May Actually Harm Credit Card Customers

Minimum Payment Information May Actually Harm Credit Card Customers
A Review of:
Stewart, J. (2009). The Cost of anchoring on credit-card minimum payments. Psychological Science in the Public Interest (in press).
by Martine Luntz

In this study, Stewart (in press, 2009) tackles the widespread problem of credit card debt. Previous research indicates that the minimum payment information provided by credit card companies, and required by law in both the United States and the United Kingdom, actually has a deleterious effect on the tendency of borrowers to keep up with payments. Stewart contends that although minimum payments are designed to protect consumers from the effect of compounding interest, they actually act as “psychological anchors”. In other words, when people are assigned a minimum amount, they generally pay less than they would have if no amount had been listed. A lower payment results in greater interest payments as the debt accrues. If this is the case, the laws that are supposed to protect consumers are unintentionally providing a greater barrier to avoiding credit card debt.

Stewart distributed a survey to confirm his hypothesis that credit card payments are correlated with minimum payments. Two hundred and forty-eight United Kingdom credit card holders responded with information on their credit card payments and the minimums required. The data confirmed that there was a significant positive correlation between minimum payment and actual repayment. In other words, the higher the minimum payment, the greater the amount paid. The results accounted for only partial repayments; minimum only repayments and full repayments were not affected by the minimum payment information.

To further investigate the relationship between minimum payment information and actually repayment, Stewart designed a hypothetical bill-payment experiment. The independent variable was the presence of minimum payment information and the dependent variable was the amount the participant would hypothetically choose to pay. The participants were a mixture of campus visitors, web page visitors, and participants recruited by a market research company.
The results show that whilst full repayments were not significantly affected by the inclusion of minimum payment information, partial repayments were. As hypothesized, minimum payment information reduced repayments of all sizes. The effect was dramatic as repayments rose from 23% of the balance when minimum payment information was present, to 40% when that information was removed.

The data from both Stewart’s survey and his experiment provide evidence that minimum-payment information does reduce the size of partial payments, supporting his hypothesis that minimum payment information acts as a psychological anchor for borrowers.
To reduce the anchoring by credit card borrowers, Stewart suggests that credit card companies be mandated to provide information such as alternative repayment scenarios to consumers. This suggestion is based on previous research that a decrease in uncertainty decreases the tendency to rely on arbitrary anchors.

The strengths of Stewart’s study are numerous. First, Stewart acquired support for his hypothesis from both a survey and an experiment, which strengthens his conclusions. Second, the results of both studies were statistically significant and dramatic. An increase in repayment from 23% to 40% with the removal of minimum-payment information is impressive. Third, the counterintuitive idea that minimum-payment information acts a barrier to repayment is a creative hypothesis. This research could lead to innovative psychological approaches in the attempt to reduce the epidemic of credit card debt.

The limitation of Stewart’s article can be expressed as a global lack of descriptive information. The literature review is shallow. It would have been helpful to have a richer background on the definition of anchoring, including examples of psychological anchors other than minimum-payments. There are also holes in the description of the method of both the survey and the experiment. Stewart does not mention how the surveys were distributed or what the response rate was, nor does he provide the demographic information of the respondents. In his description of the participants in the experiment, he declines to mention the name of the campus and the web site at which the participants were visitors or how he motivated them to participate. He also neglects to mention demographic information of these participants. Without this demographic information, it would be difficult to generalize the results of the study.

In conclusion, although some additional information in Stewart’s article may have been helpful, his is a relevant study that provides insight into contributing factors to the tendency of people to fall into credit card debt. The results of his study could help regulation agencies create laws that are more effective in protecting customers from increasing debt and the consequential compounding interest.
To cite this review, please use this reference:
Luntz, M. (2009). Minimum Payment Information May Actually Harm Credit Card Customers (3).