Credit Card Minimum Payments are Hypnotic Conditioning

Interest Payments Grow As Our Minds Become Anchored

"Your eyes feel so very heavy. You will pay only the minimum balance on your credit card…"

"Your eyes feel so very heavy. You will pay only the minimum balance on your credit card…"

We all know by now that making only the minimum payment on your credit card balance each month is a recipe for long-term debt. If that sounds appealing to you, then by all means, continue to fatten the pig. It loves the sloppy seconds (thirds… fourths…) of Joe Consumer. The best way around becoming a swine in such a situation is to pay your credit card balances in full.

But the minimum payment – the amount you must pay in order to keep ahead of accumulating interest – can be so enticing. It’s there in bold print on your bill, and would take so little out of your checking account. You’d be rid of it and have free reign to spend that money on something delicious. There it is, each and every month on your bill. It pops, and so many people have become conditioned to accept.

It’s Psychological Anchoring

It’s related to hypnotism and hypnotic conditioning, according to Neil Stewart of the University of Warwick. He writes in his Association for Psychological Science article “The Cost of Anchoring on Credit Card Minimum Repayments” that the minimum payment is a powerful suggestion that serves as a psychological anchor.

Think about it. Credit card debt is out of control. As a nation, Americans are on the hook for more than $2.5 trillion. Of that total, over $950 billion is tied up in credit cards. In the United Kingdom (from where Stewart hails), that’s nearly £175 billion with just over £55 billion on credit cards. Lenders are required by various agencies to collect at least a minimum payment each month, but you can be certain that if they could ask for less, they would. Compound interest is already a financial gale force; lack of basic regulation would prove to be a perfect storm.

Hypnotic Triggers Surround Us

This isn’t “hoodoo” or mysticism; it’s how our brains work. The power of suggestion is the cornerstone of advertising, politics/religion, sexuality and so many human affairs. Stewart suggests that anchoring in the financial sector involves using numbers to bias our judgments and decisions, even if the message is rather implausible. Call the minimum payment suggestion on a credit card statement a Jedi mind trick, if you will. You know they’re the droids you’re looking for, but the lure of the message is too hard to ignore. People should pay more, but the minimum payment suggestion is front and center like a hypnotic focal point.

Stewart’s Survey Opens Your Eyes

The author draws from a 248-member survey sample of credit card holders in the United Kingdom. They are split evenly by sex, and the ages range from 18 to 65. Of these, 196 participants carry credit card balances over. Ignoring the lure, 113 pay in full, while 83 made a smaller payment. Thirteen of these make the minimum repayment.

Perhaps Americans are more susceptible to financial hypnotism, or perhaps they are less educated than their British counterparts? I base this assertion on the marked difference in percentage of consumer credit debit being in credit cards between the nations.

So Stewart Spices it Up a Bit

Using data from a market research company, Stewart looks at a scenario where mock credit card statements were sent. Some included minimum payment information, while others did not. The outstanding balance remained the same. What he found is slightly different than what you might expect: those presented with a suggested minimum payment were not necessarily less likely to pay in full, but they definitely paid less when partial payments were made. Removing that hypnotic suggestion had a dramatic effect; mean repayment amount went up by 70 percent.

What Does This Mean for Real Credit Card Debt?

The author points out that if a consumer has a credit card debt of around $4,000 at a 20 percent APR, just a two percent reduction in the amount paid quadruples interest charges over the year. Including minimum payment numbers “roughly doubles interest charges,” Stewart found; it proves to be almost irresistible hypnotic conditioning. By the numbers, minimum payments amounting to $909 (about 23 percent of the $4,000 balance) would lead to $109 in interest charges. If the hypnotic trigger is not present (no minimum payment listed), repaying $1,603 (40 percent of the $4,000 balance) leads to a mere $49 in interest charges. “Anchoring on minimum-repayment information may be costly,” writes Stewart.

But Would Additional Warnings Help?

Not necessarily, and this is where financial education enters the picture. While additional warnings have been proposed, multiple sources Stewart engages have found that “warnings about the dangers of making only minimum repayments are likely to lead to disengagement rather than behavior adjustment.” In general, warning someone about anchoring and related hypnotic conditioning tends to prove ineffective; Americans’ general misunderstanding of compound interest certainly doesn’t help matters. However, Stewart does suggest that going one better than listing a minimum payment amount is necessary. Tables that show a variety of repayment scenarios and their impact would tend to help break the trance, so to speak. Credit card debt would lessen nationwide and make credit repair more likely. Remember, when it comes to hypnotic conditioning, nobody is being forced to do something against their will. It would be worth examining our own customs and motives when it comes to personal finance.

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