The Dangers of Credit Card Minimum Payments

Why Some People Only Repay the Minimum Amount on Outstanding Debt

Apr 25, 2009

Research undertaken by Warwick University has shown that many credit card customers are almost compelled to pay only the minimum payment on their credit card bills.

The report, published in the Journal of Psychological Science, says: “The mere presence of a minimum payment is enough to reduce the actual amount many people choose to pay on their bills, leading to further interest payments.” Such a statement will be music to the ears of credit card companies whose ‘raison d'être’ is of course to extract as much interest as possible from their customers.

Credit Card Debt

The report’s author Dr Neil Stewart has found that customers paying off their balance in full each month are immune but customers only repaying part of their credit card debt are at risk.

Credit Card Minimum Payment

Dr Stewart carried out three studies, which looked at repayment data and suggested minimum payments, from 248 credit card accounts. He found that people split into three groups:

Dr Stewart uses the term ”anchoring” describing it as a “psychological phenomenon in which arbitrary and irrelevant numbers bias peoples’ judgments.”

The report continues in some detail but in essence it seems to say that the minimum payment asked for by credit card companies is influencing those who could afford to pay more. This has a knock-on effect in terms of the amount of interest, and credit card debt, that accrues.

Credit Card Debt Part of Rising Levels of Personal Debt

Credit card companies may describe the minimum payment as a safety net for those who otherwise would not be able to make any payment. However it's essential to understand that credit card debt has had a major effect on rising levels of personal debt.

For those people who can afford to pay more that the minimum payment and don’t, it would be worth considering the figures below.

Credit Card Balance

If a card has a balance of £3000 at an interest rate of 17.9% and a minimum payment of 2% of the balance it will take a staggering 41 years to repay and cost over £6,300 in interest.

So the initial minimum payment will be £60, in five years it will have dropped to £41, in 20 years it will have been reduced to £14 and so on until the debt is finally paid (Figures from moneysavingexpert.com).

The organisations listed below can give free and independent financial advice to those worried about credit card debt

The information in this short article is not exhaustive and does not constitute financial advice.

Sources:

University of Warwick, Research finds customers’ fixation on minimum payments drives up credit card bills, October 2008

The copyright of the article The Dangers of Credit Card Minimum Payments in Personal Debt Management is owned by Neil Gunn. Permission to republish The Dangers of Credit Card Minimum Payments in print or online must be granted by the author in writing.