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Study: Debt paid off faster without minimum payment requirement?

by Peter Andrew
Study: Debt paid off faster without minimum payment requirement?

Are you one of those people who receive their monthly credit cardbills, check the minimum payment required, and then (at least usually) pay only that minimum? If so, you’re a member of quite a big club.

Credit card debt paid down more slowly

Of course, everyone knows that making only minimum payments is a very slow, and, with credit card rates the way they are, a very expensive way of paying down plastic. But, with so many other more immediate demands on household income, it’s understandable that many cardholders choose to take this route, often while promising themselves that they’ll pay off more next month.

New research published in the Journal of Marketing Research suggests that, just by showing the minimum payment required on monthly statements, credit card companies are actually encouraging people to pay down their debt more slowly.

The study, conducted by the Boston College Carroll School of Marketing in conjunction with three English universities, found that for many consumers “including the minimum required payment information on their account statements can reduce the amount they pay each month by as much as 24 percent about $120 less on a $2,000 balance.”

Linda Salisbury, a Boston College assistant professor, says, “The mere presence of minimum payment information acts like an anchor on borrowers’ repayments, pulling them downward.”

Credit card companies not to blame

Credit card companies have little choice but to show minimum payments. Salisbury explains that “this presents a tricky balancing act for lenders: removing the minimum required payment may increase repayments overall, but it would also put lenders at greater risk of increasing default levels.”

You can see her point. It’s the reason so few restaurants invite diners to pay what they think a meal is worth, and why those that have tried the experiment have tended to pull down their shutters so quickly. Plenty will pay more than necessary to keep the restaurateur in business, but plenty of others will pay way too little. If card issuers effectively made the repayment of credit card debtvoluntary, an awful lot of people might not put their hands up.

How much interest will I pay? I don’t care!

The Credit CARD Act of 2009 obliged credit card companies to show on monthly statements the potential cost of interest over the long term, along with different payment scenarios. You might think that giving consumers this additional information would empower them to make smarter choices. But no. Sadly, and surprisingly, the Boston College study found, “Disclosing future interest costs significantly increased the likelihood a cardholder would pay only the minimum required.”

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