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The Cost of Anchoring on Credit-Card Minimum

By Neil Stewart

Abstract

About three quarters of credit-card accounts attract interest charges. In the United States, credit-card debt is $951.7 billion of a total of $2,539.7 billion of consumer credit. In the United Kingdom, credit-card debt is d55.1 billion of d174.4 billion of consumer credit. The 2005 U.S. Bankruptcy Abuse Prevention and Consumer Protection Act and the 2003 United Kingdom Treasury Select Committee’s report require lenders to collect a minimum repayment of at least the interest accrued each month. Thus, people are protected from the effects of compounding interest. However, including minimum-repayment information has an unintended negative effect, because minimum repayments act as psychological anchors. In anchoring, arbitrary and irrelevant numbers bias people’s judgments (Tversky & Kahneman, 1974) and decisions (Ariely, Lowenstein, & Prelec, 2003), even when participants know that anchors are random or implausible (Chapman & Johnson, 1994). Meaningful anchors also bias judgments (e.g., Mussweiler & Strack, 2000). If decisions about credit-card repayments are anchored upon minimum-repayment information, then people will repay less than they otherwise would and incur greater interest charges (Thaler & Sunstein, 2008, independently made the same suggestion). Here, I report results of a survey and experiment consistent with this hypothesis. Specifically, a survey of credit-card repayments showed a strong correlation between minimum repayment size and actual repayment size, and an experiment in which the inclusion of minimum-repayment information was manipulated demonstrated a causal link. SURVEY Two hundred forty-eight United Kingdom credit-card holders (50 % male, 50 % female; age range 5 18–65 years) reporte

Year: 2013
OAI identifier: oai:CiteSeerX.psu:10.1.1.318.6526
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