Five Ways to Pay Off Credit Card Debt
The Psychology of Debt and Why and When to Ignore Minimum Payments on Your Bills
Apr 15, 2009
One of the best ways to pay off your credit card debt is to avoid making minimum payments – even though that’s the way your credit card statement encourages you to reduce your debt. Here’s how it works – plus a list of the best ways to pay off credit card debt.
When Minimum Credit Card Payments Are Harmful
Psychology researcher Dr Neil Stewart of the University of Warwick in Coventry, England connected the phenomenon of “anchoring” to credit card payments and debt. Anchoring is a psychological phenomenon that affects how people make judgments based on irrelevant numbers.
Dr Stewart found that the minimum payment on credit card statements acts as an anchor, and lowers the payments that people make. This extends the length of time of the credit card debt. The lower the required minimum payment on the statement, the lower the actual payments.
"Although minimum payments are a good idea in principle because they protect the small number of people who would otherwise make no repayment at all, minimum payments do seem to have an adverse effect on those who repay only part of the bill,” says Dr Stewart. “From the psychology of anchoring, we know that people are less susceptible to its effects when they have greater knowledge. So helping people understand how much different possible repayments will cost them in the long term should help protect them from anchoring on minimum payments."
So, knowing about the psychological effect of anchoring can help you reduce your credit card debt!
When to Ignore Minimum Credit Card Payments
To reduce debt, ignore the minimum payment on your credit card when you can make higher payments.
Even if you can only make a higher payment for a month or two, or only occasionally, this will help reduce your debt in the long term.
How Minimum Payments Affect Credit Card Companies
“These results should be of real concern to credit card companies,” says Dr Stewart. “Virtually all credit card statements include minimum payments, but this consumer safeguard has an unexpected negative consequence: Minimum payments distort the behavior of many customers in a way that increases interest charges and increases the duration of their debt.
"Those paying off the balance in full each month seem to be immune, but anyone repaying only part of the debt is at risk – not just those making only the minimum payment."
5 Ways to Pay Off Credit Card Debt
Instead of making minimum payments, reduce your debt by:
- Paying as much of your credit card as you can
- Prioritizing the credit cards that have the highest interest rates
- Only using your credit card for “life and death” emergencies
- Negotiating your debt if you can’t make your minimum payments
- Creating a budget, and disciplining yourself to stick to it
Related Reading
If you found 5 Ways to Pay Off Credit Card Debt helpful, try:
- Why You Make Expensive Purchases
- How Finances Affect Your Health
- Financial Infidelity in Marriage
- 10 Tips for Reducing Debt
Source:
- The University of Warwick, October 6, 2008. “Research Finds Customers’ Fixation on Minimum Payments Drives Up Credit Card Bills” Press Release. Dr Stewart's research was published in Psychological Science, in a paper called “The Cost of Anchoring on Credit Card Minimum Payments.”
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