Making More Than Minimum Effort With Credit Cards

Making the minimum may require minimum effort … and it provides minimum benefits.

We’re talking here about making the minimum payments on credit cards. As the New York Times reported this past weekend, even though consumers can actually afford to pay more than the minimum payment on their credit cards, they simply don’t and choose instead to pay the lowest amount allowed. The reason? That’s the number they gravitate towards on their statement, according to a study by the National Bureau of Economic Research. The data show that roughly a third of borrowers elect to make the minimum or only a bit more than that on a monthly basis. Such decision making, of course, leads to longer times to pay off the debt, and consumers spend more time paying off interest.

The Bureau’s research embraced data from millions of general credit card accounts, accounting for roughly 25 percent of the U.S. credit card market, with analysis of payment activity through the five years ending in 2013. The findings show that as many as nine percent to 20 percent of credit card users can afford to pay more than just the minimum on their cards, and yet they elect not to do so, with the conclusion showing that, as the Times put it, “they are highly sensitive to the minimum payment amount.” Another finding: When card issuers boost their minimum payment requirements, the holders boost their payments, too, as needed — which indicates that they could have in fact been paying more all along.

In an interview with the Times, Benjamin Keys, an economist at the Wharton School of the University of Pennsylvania and one of the study’s authors, said the minimum payment stands out as a benchmark of sorts when consumers plan how much they will pay on a monthly basis. That decision could be keyed to the most prominent number listed on the billing statement (which, again, is the minimum payment amount), he said. The stickiness of that minimum payment shines through even with the addition, over the past seven years, of the Credit CARD Act, which mandates that alternative payment plans and amounts (and their time to payoff) be listed in the statement. The typical payoff plan presented shows the payoff plan calculated over three years.