Psychology of Credit Card Minimum Instalments

New research finds that the ‘recommended minimum instalment’ suggestions on credit card statements are more influential than previously thought:

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 percent less on average when presented with a minimum payment. In the real world, this would roughly double interest charges.

I can’t help feeling that The Economist and the author of the original paper are taking a rather naïve view in believing that these recommended instalments are there for the benefit of the consumer.

Surely a more realistic view would be that they are a ‘compromise’ between keeping a card-holder perpetually in debt (maximum profit) and preventing them from defaulting on the entire amount of credit (minimum profit)?

via Freakonomics

(I digress, but it’s worth noting that outside the UK many countries don’t have laws stipulating that these ‘minimum payments’ must cover the interest to be charged in addition to a percentage of the outstanding credit—in other words they are typically designed to keep the card-holder perpetually in debt!)