The Fiendish Genius of Credit-Card Minimum Payments

New research finds that credit-card holders pay down their debts more slowly when their statements suggest a minimum monthly installment. The Economist reports on the study, by University of Warwick psychologist Dr. Neil Stewart:

Mr. Stewart presented 413 people with mock credit-card bills of ?435.76 (about $650) that were identical — except that only half mentioned a minimum payment of ?5.42. Participants were asked how much they would pay.

Among those inclined to pay the bill in full, the presence of the minimum payment hardly made any difference. However, those who wanted to pay just part of it handed over 43 percent less on average when presented with a minimum payment. In the real world, this would roughly double interest charges.

It turns out that, for those inclined to pay their debt bit by bit, the monthly minimum acts as a mental anchor, exerting an enormous amount of influence on how quickly that debt gets paid.

Stewart found that as suggested minimums drop, actual payments fall right along with them, even among people who pay above that bottom limit.

So the minimum payment can be a helpful tool for card holders. It gives them a guide on how much money to pay to keep their debt from exploding under compound interest. But it’s a much better deal for the companies that issue the cards.

Say you’re a credit card company. You make money every time one of your card holders carries a balance at the end of the month, because you charge interest on that debt. A lot of interest. The longer your card holder carries debt, the more money you make.

But if that debt tips out of control, and the card holder defaults, you lose everything.

So you want to find a middle road, a strategy that will keep your card holder’s debt manageable, but that will stretch out repayment as far into the future as possible, maximizing your profits.

Considering Stewart’s findings (paper available here), minimum monthly payments seem like the most surefire way down that middle path.


Wouldn't the best system, from the credit card company's point of view, be one where they have a MAXIMUM monthly payment -- one much lower than your full balance?

That's probably not legal (has that stopped them before). But how about this: You owe $100, minimum $5. You get a statement saying if you pay no more than $10 this month, we will give you a credit of 50 cents or a free kazoo or whatever.

Most people would pay the $10, don't you think?


I always try to ignore that minimum payment number, it's so useless! But with some of my store cards, when you get to the online payment screen, it gives you 2 options: pay minimum payment (usually $10 or $20) or "Other Amount". It won't even tell you what your bill amount was, you have to go back to the statement and check what the exact number was to pay in full. Very sneaky, but I'm not falling for it!


"the minimum payment can be a helpful tool for card holders. It gives them a guide on how much money to pay to keep their debt from exploding under compound interest."

On the contrary, the minimum payment is exactly the amount that results in your debt exploding from compound interest. That's why it's so low. If you make only the minimum payment every month, it takes upward of 15 years to pay off what you've borrowed.


I find this to be very true. We started paying down debt much faster since we started looking at a target of what we want the balance to be on each card instead of paying the minimum or just more than the minimum.

Re: Craig's comment (#1), I think that would not work - people do not trust "gifts" from companies when it comes to paying them back. It's one thing to say "if you're going to spend, use our card, we'll give you miles"; it's another to say "don't pay us back, and we'll give you a gift". It would make people actually start calculating their interest, which they don't want.


In line with Craig's comments, I remember that not long ago Discover had a program in effect (not sure if they still do) that offered some sort of reward for paying interest. I don't remember the exact details, but it was something like, if you paid your bill three months in a row, you got a rebate of the interest paid in the third month. So that was a bit of a sneaky way of encouraging people to accrue interest charges.

Gary Lambert

Many people make the mistake of thinking that credit-card debt works the same way as a reasonable car loan for example.

The mistaken notion is that the minimum payment will get your loan paid off in a reasonable amount of time.

The payoff period should be capped at something like 5 years. Perhaps 3 years would be better.

Too many people are unknowingly trapped in a life of debt slavery.


I'm skeptical.

So there is a real world negative correlation between minimum balances and the length of time it takes to repay the balance. But in the real world if the minimum payment goes up, people are forced to repay their balance more quickly. Wouldn't this cause a selection bias? People who want to pay their bills more slowly (people who don't care much for the future) choose cards with low minimum payments. Thus explaining the real world correlation without resorting to anchoring affects.

In the study, the participants face no costs from choosing a bad repayment plan so why wouldn't they be affected by anchoring? If you're asked to choose a number hypothetically and without cost for getting it wrong, then why are we surprised that people are affected by irrelevant information?

All in all, I think that study needs to be redone with a system of financial rewards and budget constraints in order to be convincing.



Credit Card companies are not as inherently evil as the public likes to believe. Many have upped their minimum payments to ensure that negative amortization does not occur. Every credit card company I know will treat you really well if you you pay your bill on time every month (even in full), as they make a lot of money from transactors who don't charge off... They even go so far as rewarding you with cash, merchandise, air travel, etc. for doing just that. Take advantage of their generosity.


I think that study is very flawed. I mean, it doesn't take into account people's situations as to why they might pay the minimum amount.

In our blossoming economy(sarcasm), its hard to pay much more than the $12 minimum payment when you only collect $750/month on unemployment.


So minimum payments act as a set point as behavioral theory predicts. The real question is the extent to which the card companies have - fiendishly, as the headline suggests - tested minimum payment levels.


I agree with Poster #9. I would like to know what instructions the participants were given when they were asked to decide what their payment would be. My decision would depend completely upon my total financial situation and how much cash I had available. I would certainly pay a lot more if I had $50,000 available instead of $1,000 - common sense. More info about this study is needed.


I always find it amusing how people complain about banks charging fees to "access their own money". do people forget that a bank is a BUSINESS designed to maximise returns for its shareholders?

It makes perfect sense to do as the paper suggests - keep peole holding their balances as long as possible and therefore maximising profits. And people who think banks are evil are just nieve.

Credit card companies are a tool, and should be used as such - if you don't like paying for the service, don't use it.


Poster #6,

That 'debt slavery' you allude to, is of their own making.


I'm not surprised by the results of the study. In college I did the usual, got a credit card thinking I'd have to start somewhere to get a credit record. I usually just paid the minimum, but once I looked to see how long it would take me to pay it off (nothing exorbitant there), I started to see how much money I was flushing down the tubes. After really cracking down on our finances my husband and I are only 2 years away from paying off the mortgage (the last of our debt) and saving more in interest than our property cost in the first place.


if there is no minimum payment isn't the rational action to pay nothing. who cares how large the debt grows if you never have to make a payment.

the jokestir

Now what I do is pay at least double or triple the minimum when I can. It's called beating the odds. And I love beets, beats, bets and dancing) The debtors don't expect it. Who benefits long term? Let the seller beware!

Al Marsh

@8, Jamie, you said: "Every credit card company I know will treat you really well if you you pay your bill on time every month (even in full), as they make a lot of money from transactors who don't charge off..."

Maybe, but there was a card company in the UK a couple of years ago who cancelled the cards of people who paid in full, because they weren't making the company any money.


I don't understand why ppl manage their money so poorly. I use credit cards when I have to, pay whatever I can afford & pay it off when I can. I have had times where I needed to live off my credit cards & I still paid it all off as soon as I could.

So many of my peers rack up debt over multiple cards for frivolous purchases because they believe somehow that it's normal or expected to pay $500 - $600 a month in credit card bills that will never in reality get paid off. These are the people that own every toy under the son, wear the nicest threads & complain that they are broke.

I too agree that the study is flawed & therefore the results may be skewed. On a preliminary level it is interesting though, I would be interested to see another study on it. I would like to the understand the psychology of chronic debtors. I always figured they were just bad at math - :)~


The credit card companies are aware of this kind of behavior and consciously exploit it. Frontline in cooperation with the NYTimes did an expose on this in 2005, it included an interview with Andrew Kahr, the consultant who recommended a lot of credit card company practices such as lowering the minimum monthly payment to maximize credit card company returns and keep card holders in debt for a longer period of time. The name of the program was "The Secret History of the Credit Card." I believe it was during that show that someone mentioned that people who pay off their credit card balances every month are referred to in the business as "deadbeats." You can find further information on the show on the Frontline Web site.


"Poster #6,

That 'debt slavery' you allude to, is of their own making.
- Shelby"

Yes, life is simple. I like when the Bushes tell similar things to children of ghettos.