The 2009 Credit Card Act made it necessary for lenders to give their customers more detailed information pertaining to their bills. As a result, credit card statements now include information pertaining to minimum payments, overall balances, due dates and the amount of time that it will take to pay the full balance on an account when making minimum payments. This information has been available to consumers since 2010, although it has long been possible for people to make these calculations themselves. While this newly posted data might seem a bit depressing, it has brought an important and undeniable fact to light: Making minimum payments is not sufficient for resolving credit card debt within a reasonable and acceptable amount of time.
When working with these companies and managing their accounts, consumers often overlook the fact that banks are doing all that they can to generate optimal profits from each one of their customers. This includes using strategic and even psychological tactics to get people to rack up larger bills. Doing so helps these entities to drive their profits even higher.
The average billing statement is riddled with tricks and traps that can cause long-term financial problems for unsuspecting consumers. People only need to take stock of their most recent statements in order to see how lenders are actively encouraging people to spend more and take longer in paying their bills off.
The Problem With Minimum Payments
For most bills, the amount due and the total amount due are one and the same. With credit card statements, however, this simply isn't so. Cardholders have the option of paying just 2% of the amount owed in order for their current payments to be satisfied. This isn't a show of generosity on the part of the creditor, however, but is instead an effort to ensure that people wind up owing them more.
While this might seem like common knowledge for some, the regulations on billing practices established that were established in 2009 are a sure sign that this is a connection that most consumers simply weren't making.
When consumers see a minimum payment amount, this often plays a major role in determining how much they are going to remit. When companies give consumers the lowest possible number, they are using a psychological strategy to increase debt that is based on anchoring. Anchoring is a cognitive bias that causes people to take action based upon the first data supplied, even if this data is not applicable to their overall concerns.
When it comes to the use of anchoring in billing statements, people are driven to pay less when offered a minimum amount first, then if simply offered a total account balance. Even if consumers pay beyond the minimum balance in spite of the anchoring strategy that has been used, they will still pay much less than if the anchoring had never been used at all. Either way, credit card companies are guaranteed to win.
The Availability Of Credit And The Framing Effect
These companies have many more strategies at their disposal and they certainly don't stop at anchoring tactics that cause people to pay far less on their bills than they really should. They also use something called the framing effect. This is done when telling consumers something that they could easily calculate on their own: the amount of available credit. The framing effect is yet another cognitive bias that can impact consumer decisions when it comes to using credit and paying it off.
The framing effect essentially shows how people react differently to the same information, according to how it is presented. Telling someone that their cup is half full when it is obviously still half-empty, helps them to process this data in a more positive way. Whether a cup is half empty or half full amounts to perception, but in either instance, the same amount of substance exists.
When showing cardholders how much credit they have available, these companies know that consumers are far less likely to think about the amount of debt that they have left to pay off. In fact, this actually lessens the negative feelings that are associated with the debt overall. Some people may even use this information to plan additional purchases, given that they have been encouraged to view the proverbial cup as being half full.
This way of seeing things can obviously lead to problems. Spending more will mean having more to pay back, including more interest. Moreover, spending too much can have a negative impact on consumer credit scores. Unfortunately, most people are hardwired to make snap decisions based upon the first information that is presented (anchoring), and on the way that it is presented (the framing effect). With their available credit limits in mind, most people will find it easier to give into temptation and continue spending.
Convenience Checks Aren't All That Convenient
Creditors also know that consumers operate under the assumption that if something is advertised as convenient, than it is sure to bring them greater ease. Unfortunately, convenience checks are another sly tactic being used by lenders that causes people to rack up new bills without any real thoughts about their long-term consequences. When people take stock of the fine print concerning these products, they will find that they are no different in terms of interest, than cash advances. Thus, each convenience check that a cardholder uses, will have a significantly higher interest rate than purchases that are paid for by swiping a card instead. Although using these checks might seem easier than ordering new checks from the bank or reassessing personal budgets, these products are guaranteed to be far less convenient once all of the associated fees have been factored in.
Sidestepping The Psychological Trickery
The surest way to avoid getting tricked into spending more money, acquiring more debt and taking far longer than necessary to pay it all off, is for consumers to simply do their own calculations. When possible, people should try to pay their balances in full each month. When this is not feasible repayment plan, however, they should calculate a reasonable monthly payment on their own, that is in excess of the minimum. Above all things, it is vital to avoid costly mistakes like using convenience checks, which provide only nominal benefits, if any, after all of the hidden costs have been factored in.
