Here’s a fun way to introduce behavioral finance and psychology into your credit card lesson. It describes research into consumer behavior that demonstrates how consumers act irrationally to changes in the minimum payment that credit cards require in their monthly statements. It describes a phenomenon described as “anchoring bias” which leads consumers to pay down their credit cards slower than perhaps they could financially.

From Washington Post (about 1,000 words, 4 minutes in length), here’s the set-up (emphasis below is mine):

Unlike your typical mortgage or car loan, credit cards are a door to open-ended debt. There exist no standard repayment plans, no deadlines to keep you on track. Beyond a token minimum each month, you’re free to mail in as much or as little money as you like. It turns out that the human mind is terrible at dealing with all that flexibility.

Only a quarter to a third of credit-card users pay off their bills in full every month. Most Americans carry a balance, and as new research shows, a surprising number of them pay close to the minimum each month — even when it’s clear that they could easily settle their debt faster and save a ton of money in interest payments.

Here’s a summary of the fascinating research (emphasis is mine):

Recently, in one of the largest studies of its kind, economists Benjamin Keys and Jialan Wang reviewed data from millions of credit card accounts between 2008-2013. They analyzed what happened to customers when credit card companies made small, routine adjustments to their minimum payment policies.

Sometimes, minimum payments would go up a smidge — on average, by about $15 per account. These sudden increases didn’t seem to cause much financial stress. The economists couldn’t find evidence of more missed payments, which suggests that most Americans can afford to pay down their credit card debt a little faster.

But Keys and Wang noticed that at least 10 to 20 percent of people behaved quite strangely. They would always try to stay just ahead of the minimum. If their minimum payment went up, they would pay the new minimum plus a little extra. If it went down, they would decrease their payments a little, but not all the way.

This behavior makes no sense. Credit card debt is the priciest kind of debt for most Americans, and financial advisers say you should try to get rid of it as quickly as possible. You shouldn’t even be paying attention to fluctuations in the minimum payment, because you should already be paying as much as you can.

Questions for your students to ponder:

• What is the minimum payment listed on a credit card statement?
• How is the minimum payment determined and who decides what it is?
• Can cardholders pay more than the minimum payment?
• In your own words, what did the research find about human behavior and minimum payments on credit card?
• How can you apply this research as you think about how you will use credit cards?

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Check out this NGPF Fine Print which shows the Minimum Payment in an actual credit card statement: Deciphering Your Credit Card Statement

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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