Hundreds of participants were given a credit-card bill with an outstanding balance of £435.76 and asked how much they could afford to pay off, given their real-life finances. Crucially, half the participants were shown what the minimum compulsory payment was and half weren’t.
The presence or not of information about a minimum payment didn’t affect the proportion of participants who said they’d pay the balance off in full. However, among those 45 per cent of participants who said they’d pay only some of the bill, the presence of information about the minimum required payment had a dramatic effect on how much they said they’d pay.
Among the partial payers, those who saw information on the minimum required payment (which was £5.42) said they’d pay off 70 per cent less than those who didn’t see information on the minimum payment.
It also turns out that people who pay more than the minimum but less than the total every month are unconsciously influenced by the minimum require payment – the higher it is, the more they will pay, and vice-versa. The reason has to do with anchoring, a cognitive bias much studied by behavioural economists.
It’s well known that credit card companies make a lot of money from people who maintain outstanding balances but keep up-to-date with their minimum monthly payments, so I don’t suppose they will be too unhappy about this particular finding. By advertising a low minimum payment they can pull off the happy trick of appearing benevolent and making more money. But for the many people who rely on credit cards, these are not trivial results – the study’s author estimates that in practice people could end up paying double the amount of interest they need to, simply as a result of this biasing effect.
This is a nice illustration of how behavioural economics can shed light on issues of practical importance – rather as the authors of this year must-read, Nudge, have been arguing. (Needless to say, nef was ahead of the curve on this particular trend.)