Saturday, December 27, 2008

Anchoring and credit card minimum payments

"Anchoring" is the psychological effect that, when presented with a sample number prior to being asked to estimate some quantity, people tend to stick closer to that sample number than they would if no number were mentioned, even if the number is completely irrelevant to what's being estimated.

A study by Neil Stewart at Warwick University suggests that minimum payment amounts on credit card bills cause people to pay less on their credit cards per month than they otherwise would, since the minimum payment tends to be extremely low. While it has no effect on those who intend to pay off the full monthly amount (the only reasonable way to use credit cards, in my opinion), Stewart's work suggests that those who pay less than the full amount pay 43% less on average than they would if no minimum payment were specified.

While this might be interpreted as counter to the intent of a minimum payment, I suspect it's exactly the intended effect from the credit card companies--to drag out payments over the longest possible time and accumulate the most interest.


Joshua said...

Fascinating stuff Jim, I agree with you on the CCs doing it on purpose. It's a shame to think that psychological research these days is being invested in figuring out to extract money from people, or how to convince people to do things they otherwise would not. More about the CC companies please.


Jim Lippard said...

I was thinking about putting up a post about yesterday's mail, which was full of ridiculous credit card offers. I think my opting out of pre-approved credit card offers must have expired.

I dumped them all in the shredder already, though...

Gordon said...

When I was a professional fundraiser we used this principal to get larger donations by putting tick boxes on forms starting with higher amounts at the left hand side. The amounts were selected depending on the net worth of the target audience. We tested putting them in ascending or decending order and we made a lot more by putting the higher values first.