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Anchoring: Why credit card debt weighs you down

Researchers estimate up to 20 percent of us base our credit card payments on the minimum due based on a psychological phenomenon called anchoring. (Source: NPN) Researchers estimate up to 20 percent of us base our credit card payments on the minimum due based on a psychological phenomenon called anchoring. (Source: NPN)
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Research shows the average American household carries a $16,000 balance, sometimes over multiple credit cards, at any given time.

So, why aren’t we working harder to pay them off?

New research claims it may not be because we can’t or don’t want to, but because of a psychological phenomenon associated with credit card bills themselves.

For years Brian Brandow had a good paying job, a nice house and a boatload of credit card debt.

“We were spending more money than we were making and using credit cards to try to finance that,” Brandow said.

When the bill came each month, he paid the minimum even when he could afford to pay more.

“We would take that money and look for other ways to spend it,” Brandow said. “We felt if we could make the minimum payment, regardless of balance, then we would be OK.”

Researchers estimate nine to 20 percent of us base our payments on the minimum due, even if we can pay extra.

Now, a new report suggests a reason why: a psychological phenomenon called anchoring.

“Anchoring is the idea that some piece of information, maybe it’s completely irrelevant information, is having an influence on your decision,” Benjamin Keys, the study’s co-author and economist at the University of Pennsylvania, said.

In this case, Keys says that’s the minimum payment, which is always featured up front and center on your bill.

“It’s right in the dead center of every month’s account statement,” Keys said. “I think a lot of consumers use that as a guide to influence their choices more strongly than they otherwise should.”

While the Credit CARD Act of 2009 forced companies to add disclosures on minimum payments to their bills, Keys says it has not stopped anchoring behavior.

“I’d like to see credit card companies do more to inform their customers about the time that it takes to repay their debt if they’re only paying the minimum,” Keys said. “Give them online tools to allow them to develop a budget and a repayment plan that works for them.”

As for Brandow and his family, it took four years of cutting spending, but today they are debt free.

“We just really kind of fell into the trap that everybody has a credit card, everybody has credit card debt. It’s normal to do that,” Brandow said. “People need financial education.” 

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