Minimum payments 'drive up debt'

Credit card debt is being driven up by consumers' "fixation" on minimum repayment levels, new research shows.

A study carried out by the University of Warwick found that the presence of minimum repayment sums on credit card bills caused many people to reduce the amount they chose to repay each month.

It warned that the impact of these minimum repayment figures could double the amount of interest consumers paid during the lifetime of their debt.

The research centres on the psychological phenomenon of "anchoring", under which arbitrary and irrelevant numbers bias people's judgments.

It found that "anchoring" affects the way that people repay their credit card bills, reducing repayments each month for the third of cardholders who pay back neither the full amount nor just the minimum.

Psychology researcher Dr Neil Stewart said: "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 behaviour of many customers in a way that increases interest charges and increases the duration of their debt."

A study of 248 real credit card bills which were looked at as part of the research showed that 58% of people repaid their balance in full, suggesting they were unaffected by the minimum repayment figure.

But 7% paid only the minimum, while 36% made a partial payment above the minimum but below the full balance.

The third group was found to be highly influenced by the level of minimum repayments, with the amount they repaid closely correlated to the minimum repayment level.

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