Sunday, June 3, 2012

How Paying the Minimum Payment Makes You A Frog

A Australian Green Tree Frog (Photo credit: Wikipedia)We don't realize how often companies use psychology on us to make money. There are many ways psychology is used but did you know it's used on your credit card statement. In a recent study the amount of your minimum payments can influence how much of your balance you decide to pay off each month.

Specifically, according to the Wall Street Journal, the study looked at how people’s behavior changed when they saw a specific number marked down as a required minimum payment on their hypothetical credit card bill:

"A random sample of 591 Americans saw a made up credit-card statement showing a balance of $1,739, and an annual percentage rate of 12%. Some people saw no further information, while others were informed that a minimum payment of 2% of the balance was due."

What they found is that people who did not see any minimum payment number desired to pay a higher amount of their balance — significantly more than 2% — whereas people who were shown the minimum payment number were inclined to pay closer to 2% (meaning they’d be in debt longer).

We can speculate that this is because the 2% amount acts as an anchor in determining what you consider a “reasonable” payment to be.

Maybe you had planned to pay off the balance in 6 months, but since the bank is only asking you for 2% on your credit card statement, you figure that’s the right course of action. After all, they’re your bank, they must know what’s appropriate for you, right?

And that’s how you become the proverbial frog in a pot of boiling water. You wouldn’t allow the bank to take $1,000 or $5,000 or $10,000 in interest payments from you in one day, but by convincing you to succumb to the minimum payments myth they quietly take that much from you over the course of several years. It happens so gradually that you might barely notice until it’s too late.


What You Can Do About It?


You need to fight this inclination to pay only minimum payments. Add up the dollar amount of the interest you will be paying over the life of the payback period. Realize that all that interest will be coming out of your pocket for no good reason. Ignore the minimum payment, double or triple it and send that amount in every month. Get the thing paid off and don't be a frog.



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