Information On Bill May Affect Credit Card Payments

How much do you pay on your credit card bill each month? The entire balance, the minimum payment, or something in between?

Your payment probably has a lot to do with your financial circumstances and your money management philosophy, but a new study suggests there is another factor at work.

International researchers say they found credit card customers will pay less if the bill lists information about the minimum amount due. According to Boston College Professor of Marketing Kay Lemon and Assistant Professor Linda Salisbury, it can reduce the amount they pay each month by as much as 24 percent – about $120 less on a $2,000 balance.

Too much information

“The mere presence of minimum payment information acts like an anchor on borrowers’ repayments, pulling them downward,” said Salisbury. “This presents a tricky balancing act for lenders; removing the minimum required payment may increase repayments overall, but it would also put lenders at greater risk of increasing default levels.”

The findings are based on surveys of more than 500 U.S. consumers and an analysis of anonymous data for more than 100,000 British cardholders from 11 different lenders.

Average household credit card debt is around $10,000. Those who have a high interest rate and make only the minimum payment each month might never pay down the balance.

Counterproductive?

The U.S. government now requires lenders to include a range of debt and repayment information with monthly statements. The researchers wondered if providing that information actually motivates consumers to pay down their debt.

The study found that increasing the minimum required payment – typically from two percent to five percent of the loan balance – actually had a positive effect on repayment for most consumers. However, that alone wasn’t enough to overcome the negative effects of posting the minimum required payment, according to the researchers from Boston College and the University of Warwick, University of Essex and University College London, all in the United Kingdom.

In addition, displaying information like payment scenario timelines and potential long-term interest costs – as is now required on US credit card statements – did not encourage increased payments. In fact, disclosing future interest costs significantly increased the likelihood a cardholder would pay only the minimum required.

It may be that some borrowers pay the minimum each month because that's all they can afford to pay. Before the CARD act went into effect, some credit card companies jacked up interest rates on existing balances, causing minimum payments to rise and in some cases, balances to grow.