The psychology behind minimum payments to avoid credit card bailout..

Researchers in Coventry, England, are saying a small segment of the population who, when presented with the option of making only the minimum payment instead of more, choose to do so. Earth-shattering, right?

According to University of Warwick psychology researcher Dr. Neil Stewart, whose research will be published in "Psychological Science," "the mere presence of a minimum payment is enough to reduce the actual amount many people choose to pay on their bills, leading to further interest payments." In a nutshell, Dr. Stewart is saying that some people don't understand the long-term implications of not paying off their credit card balances in larger chunks. Stewart calls this psychological phenomenon "anchoring."

An anchor, as Stewart's research implies, is an element that discourages rather than encourages higher payments on outstanding balances. When conducting studies to support his research, Stewart's team found that when some participants were presented with credit card bills with no minimum payment information and others were presented credit card bills with minimum payment information, the participants paid more on the bills with no minimum payment information.

The good news is that more than half of the study participants (55 percent) chose to pay off their credit card balances in full. Unfortunately, however, there appeared to be no consideration of the participants' current financial situation, which would, it seems, have some influence over how much was paid. Stewart's conclusion was that while minimum payments protect the small number of people who would choose to make no repayment on their credit card debt, they have an adverse effect on those who only pay a portion of the balance. In essence, "helping people understand how much different possible repayments will cost them in the long term should help protect them from anchoring on minimum payments," says Stewart. That is exactly what the U.S. Federal Reserve proposes in its Regulation Z revisions, which seek to require installment credit issuers to include disclosures warning consumers of the implications of only making minimum payments on their accounts -- namely, it will result in you paying more interest over a longer period of time.

In an article about the study, Stewart says, "These results should be of real concern to credit card companies. Virtually all credit card statements include minimum payments. But this consumer safeguard has an unexpected negative consequence: Minimum payments distort the behavior of many customers in a way that increases interest charges and increases the duration of their debt."

Not to make light of Dr. Stewarts research, but I think credit card companies have been privy to this anchoring phenomenon for a long time, and they most likely appreciate this bit of reaffirmation.