Minimum payments might lead to a numbers bias among cardholders, due to a psychological phenomeonon known as "anchoring".
Credit card holders risk debt by focussing too much on their minimum payments, a researcher from the University of Warwick has claimed.
In a new paper published in academic journal Psychological Science, Dr Neil Stewart suggests that the presence of a minimum amount to pay off each month in credit card bills leads to customers consistently paying off less of their debts. This is due to the psychological process of "anchoring" - which occurs when people let a single factor cloud their general perception of a situation.
With minimum payments, the presence of a single "anchor" leads to a number bias among credit card customers, Dr Stewart argued. This leads to the cardholder feeling that they can "get away" with paying the smallest amount possible, while forgetting about the total amount they have still to pay back.
Dr Stewart said that "anchoring" is particularly strong in the 35 percent of card customers who make only partial repayments on their balances.
He added: "Virtually all credit card statements include minimum payments. But this consumer safeguard has an unexpected negative consequence: Minimum payments distort the behaviour 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…These results should be of real concern to credit card companies."
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