The Anchor of the Minimum Payment

When you stop and think clearly about it, paying the monthly minimum on a credit card payment means taking a long time and a large expense to get out of debt. But that doesn’t mean that people think clearly when they see that small number.

That has been demonstrated by the research of Neil Stewart of England’s University of Warwick. He discovered that a minimum payment included on a bill has an “anchoring effect” on the payment a person makes. What does this mean? When some people see a minimum payment, they will make a smaller payment than they would if it were not there.

This appears to be a mental thing. One type of bill payer will pay the bill in full. Another type of bill payer will make only the minimum payment, when that option is available. It’s the third type of payer, those paying less than the full amount but more than the minimum, where we see this anchoring effect.

In Stewart’s experiment, a group of people were given a bill to pay. About 55 percent of the people paid the total in full, whether there was a minimum payment written down or not. Among the rest, a person without a minimum payment written on the bill paid 40 percent of the total owed. A person with a minimum payment on the bill paid only 23 percent of the total.

Let’s use a $100 bill as a hypothetical example, to keep the figures round. Fifty-five percent would pay the full $100. Now let’s talk about the rest. If a person is shown no minimum payment on that $100 bill, that person would pay off, on average, $40. Yet let’s say we show the same $100 bill, but this time we add a minimum payment. Those people would pay $23, on average. That gap makes up the anchoring effect, and Stewart estimates it could double the amount of interest paid over the life of a debt.