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Study: Minimum payment warnings prompt some to pay less

Kelly Dilworth

You probably noticed those scary minimum payment warnings that started appearing on your credit card bill a few years ago. Pay only the minimum, they say, and it will take you years and years to pay back what you borrowed.

Credit card issuers have been required by law since 2010 to post such warnings on your credit card statements. They estimate how much time it’ll take you to pay off your current balance — and how much hefty interest you’ll have to pay — if you only pay the minimum amount due. Card issuers must also disclose how much more you’d need to pay each month to pay off your balance in three years.


Initial research showed the law was working as intended — the idea of being in debt for a decade or more was prompting people to boost payments. Credit counselors we talked to at the time used phrases such as “scared straight” and “sticker shock.”

But new research published in the Journal of Public Policy and Marketing found that second part of the required disclosure — the three-year payoff amount — could have an unintended side effect. That three-year monthly payment amount listed on most credit card statements may be prompting some consumers to pay less than they would otherwise.

“Some people, once they realize the dollar amount that will get them paid off in three years, think, ‘Oh, I’m paying more than I need to get paid off in three years. Three years seems like a pretty reasonable amount,’ and that might decrease their payment,” said study author Linda Salisbury in a press release.

Some consumers may also be misinterpreting the dollar amount as a suggestion rather than a warning, speculates Salisbury, and using it to guide their payments. “Sometimes these nudges can be perceived by consumers as implicit recommendations like, ‘Oh, they’re telling me this three-year amount. Three years must be a good target range for me to pay it off so I think maybe that’s a good idea and I’ll pay it off in that time frame.”

The problem is the three-year payment amount listed on people’s credit card statements is only accurate if they don’t charge any more debt to their card. If you keep using your card regularly, then the three-year payoff amount will continue to grow with each bill. Additional charging without additional payments mean it could take you a lot longer than three years to clear your balance if you only pay that amount.

Some pay more
Not everyone reacts the same way to the minimum payment warnings they see listed on their credit card statements. In some cases, the three-year repayment amount may actually inspire chronically low payers to fork over a larger amount.

For example, some of the consumers in Salisbury’s study tended to pay more when they saw the three-year payment information instead of less.

That’s because people tend to fixate on the three year-payment number and will often readjust their behavior based on the number they see listed, says Salisbury. “When the three-year information appears on the statement, you see a lot of payments move toward the three year amount,” she said in the release.

Salisbury likens the number to an anchor drawing people in, regardless of what their intentions were before they saw their bill. “It’s sort of bringing payments toward it. Some are doing what the regulation intended, which is increasing people’s payments, but it’s also doing this unintended thing, which is bringing some payments down.”

Salisbury came to her conclusions after conducting experiments in which people were shown different kinds of credit card statements that had various warnings and minimum payment information on them. Some people chose to pay less in response to the three-year payment information. Others chose to pay more. “One of the big takeaways is that the same kinds of interventions might have different impacts on different segments of consumers,” said Salisbury. “In this case, it might make people who tend to pay very low amounts more likely to increase. But it may unintentionally lead people who would have paid more to pay less because this information somehow nudges them downward.”

Salisbury’s conclusions are similar to previous research that also found a connection to the three-year payment information and borrower’s behavior. For example, a 2011 study by researchers at Harvard Business School found that a substantial number of cardholders increased their monthly payment amounts to at or near the three-year amount listed on their credit card statements after the Credit CARD Act of 2009 forced card issuers to disclose that information.

Another study released by the University of Pennsylvania in April found that the minimum payment warnings mandated by the CARD Act have prompted cardholders to pay an average of $19 more than they did before.

Your bottom line
Regardless of what’s on your credit card statement, try to pay the maximum amount you can afford. The more you pay now, the less you’ll have to pay overall.

You’ll also pay off your debt quicker if you pay significantly more than the minimum amount due. To get a sense of how much faster you can pay off your debt if you substantially increase your credit card payments, check out the payoff calculator, which allows you to input different amounts and see how long it’ll take you to clear your balances for good.

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  • J.K. Risher

    I send in a payment on my credit cards every payperiod when ever I have a balance. This really helps me a lot.