Daily Archives: September 22, 2009

A Time to Repay

800px-Credit-cards

In tough economic times, financial experts often recommend reducing debt as much as possible. For many people, this debt stems from credit cards. The credit card industry has been scrutinized in recent months due to a number of questionable practices, such as dramatic raises in interest rates and reductions in credit limits with little to no notice. To combat these issues, the U.S. government has passed a bill to better protect consumers from actions that they feel are unfair and burdensome. Many hope that these protective measures will better allow consumers to get out of debt.

However, a recent study in Psychological Science highlights how less overt factors may be at least partly to blame for the credit card debt that plagues many people. Classic work by Tversky and Kahneman (1974) has shown that people tend to anchor to arbitrary numbers when making decisions. Additionally, a recent study shows that anchoring is particularly problematic when it comes to credit card statements. In his work, Neil Stewart (2009) gave participants a mock credit card bill that featured a minimum repayment amount or an identical statement with no such repayment amount. He then asked them to state how much of the credit card balance they would pay off.

Stewart found that people anchored to the minimum repayment amount and stated that they would pay less of the credit card balance when compared to people who were not given a repayment amount. From this work, one might conclude that changes to billing practices, particularly the presentation of billing information, may go a long way in reducing mental biases and help consumers get out of debt.

square-eyeThe Real Problem With Creditholders: The Cardholders

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Stewart, N. (2009). The Cost of Anchoring on Credit-Card Minimum Repayments.