Article2008

The Cost of Anchoring on Credit-Card Minimum Repayments

158 citations0/0 files storedPsychological Science

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Decision-Making and Behavioral Economics Financial Literacy, Pension, Retirement Analysis Financial Literacy and Behavior

Abstract

About three quarters of credit card accounts attract interest charges. In the US, credit card debt is $951.7 billion of a total of $2,539.7 billion of consumer credit. In the UK, credit card debt is £55.1 billion of £174.4 billion of consumer credit. The 2005 US Bankruptcy Abuse Prevention and Consumer Protection Act and the 2003 UK Treasury Select Committee's report require lenders to collect a minimum payment of at least the interest accrued each month. Thus people are protected from the effects of compounding interest. But including minimum payment information has an unintended negative effect, because minimum payments act as psychological anchors.

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References

1974Judgment under Uncertainty: Heuristics and Biases 1975Judgment under Uncertainty: Heuristics and Biases 2008Nudge: improving decisions about health, wealth, and happiness 2017The University of Chicago Law Review 2003"Coherent Arbitrariness": Stable Demand Curves Without Stable Preferences 1996A new look at anchoring effects: Basic anchoring and its antecedents.1994The limits of anchoring 2000Numeric Judgments under Uncertainty: The Role of Knowledge in Anchoring

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2009Grape expectations: The role of cognitive influences in color–flavor interactions 2019How Do Individuals Repay Their Debt? The Balance-Matching Heuristic 2011Communicating environmental risks: Clarifying the severity effect in interpretations of verbal probability expressions.2011Winning the Battle but Losing the War: The Psychology of Debt Management 2011Minimum Required Payment and Supplemental Information Disclosure Effects on Consumer Debt Repayment Decisions

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