4 ms·

The Fiendish Genius of Credit-Card Minimum Payments

14 points by bd 18y ago

bd 18y ago
Also some interesting comments here: "The card industry has been very quick to internalize the insights of behavioral finance and apply them to maximize profit by exploiting consumers' cognitive biases. There's probably no other industry that knows as much about consumer behavior, and they are constantly learning more..." http://www.portfolio.com/views/blogs/market-movers/2008/12/17/adam-levitin-on-credit-card-minimum-payments http://www.portfolio.com/views/blogs/market-movers/2008/12/1...
mdasen 18y ago
Part of the problem is that people don't do business with a company because of the intangibles. Even in technology, people look for things that can appear in lists or price. We really need a better way to measure the intangibles of businesses we work with, how we're going to be treated, etc.
- petercooper 18y ago
  I agree in a general sense, but do you think it's worth measuring how we're "treated" in terms psychological devices such as minimum payments? (since this is what the story is related to) I don't see these psychological devices as nefarious at all. Some stores use scents or music to encourage sales, some use layouts, displays, or loss leaders to persuade people to buy things. Sadly, the word "fiendish" in the title is a real misnomer. Is the 99 cents (rather than pricing at dollar amounts) device "fiendish"? Sounds like people are just looking for scapegoats in a crisis.
  - GHFigs 18y ago
    Whether "fiendish" is the right word for it or not, I think there is an important distinction to be made between the use of such tactics by retailers vs. creditors. While a store is limited in it's ability to extract money (i.e. time, labor) from a person by the contents of their wallet, a lender is only limited by the length of a person's lifespan.
    - petercooper 18y ago
      You could twist it round though.. people wouldn't use as much credit if it were not for the tactics used in retail ;-)
aneesh 18y ago
This is far more pervasive that just minimum payments. Behavioral economics research has shown the power of defaults -- make a group or policy opt-out instead of opt-in and you'll get a lot more people to join it, even though the two situations are technically identical. Seems to be the same psychological principle at work here.
- jwesley 18y ago
  I think that's just the result of people not closely examining the page and leaving a box checked, vs. deliberately checking it. Requiring users to do anything will almost always have a lower conversion rate than requiring them to do nothing.
sokoloff 18y ago
I can almost guarantee that if a card issuer were to unilaterally (not by force of regulation, or by industry-wide standard practice) raise the minimum payment formula to something that I would find rational (3-5 year payoff period perhaps), that there would be an immediate hue and cry about how damaging that action was to disenfranchised borrowers, as some people were "just getting by" before and now they're going to be in debt trouble by virtue of this action. (Newsflash, they only appeared to be getting by before and they were already deep in debt trouble, but that's not how it would be reported and complained about.) Though I'm of the opinion "let adults make adult decisions for themselves, don't have government be a nanny", here even I can see a reason to regulate (whether by government, or ideally by an organization like PCI) minimum payments higher than a 30 year amortization schedule.

14 points by bd 18y ago

bd 18y ago

Also some interesting comments here: "The card industry has been very quick to internalize the insights of behavioral finance and apply them to maximize profit by exploiting consumers' cognitive biases. There's probably no other industry that knows as much about consumer behavior, and they are constantly learning more..." http://www.portfolio.com/views/blogs/market-movers/2008/12/17/adam-levitin-on-credit-card-minimum-payments http://www.portfolio.com/views/blogs/market-movers/2008/12/1...

mdasen 18y ago

Part of the problem is that people don't do business with a company because of the intangibles. Even in technology, people look for things that can appear in lists or price. We really need a better way to measure the intangibles of businesses we work with, how we're going to be treated, etc.

petercooper 18y ago
I agree in a general sense, but do you think it's worth measuring how we're "treated" in terms psychological devices such as minimum payments? (since this is what the story is related to) I don't see these psychological devices as nefarious at all. Some stores use scents or music to encourage sales, some use layouts, displays, or loss leaders to persuade people to buy things. Sadly, the word "fiendish" in the title is a real misnomer. Is the 99 cents (rather than pricing at dollar amounts) device "fiendish"? Sounds like people are just looking for scapegoats in a crisis.
- GHFigs 18y ago
  Whether "fiendish" is the right word for it or not, I think there is an important distinction to be made between the use of such tactics by retailers vs. creditors. While a store is limited in it's ability to extract money (i.e. time, labor) from a person by the contents of their wallet, a lender is only limited by the length of a person's lifespan.
  - petercooper 18y ago
    You could twist it round though.. people wouldn't use as much credit if it were not for the tactics used in retail ;-)

aneesh 18y ago

This is far more pervasive that just minimum payments. Behavioral economics research has shown the power of defaults -- make a group or policy opt-out instead of opt-in and you'll get a lot more people to join it, even though the two situations are technically identical. Seems to be the same psychological principle at work here.

jwesley 18y ago
I think that's just the result of people not closely examining the page and leaving a box checked, vs. deliberately checking it. Requiring users to do anything will almost always have a lower conversion rate than requiring them to do nothing.

sokoloff 18y ago

I can almost guarantee that if a card issuer were to unilaterally (not by force of regulation, or by industry-wide standard practice) raise the minimum payment formula to something that I would find rational (3-5 year payoff period perhaps), that there would be an immediate hue and cry about how damaging that action was to disenfranchised borrowers, as some people were "just getting by" before and now they're going to be in debt trouble by virtue of this action. (Newsflash, they only appeared to be getting by before and they were already deep in debt trouble, but that's not how it would be reported and complained about.) Though I'm of the opinion "let adults make adult decisions for themselves, don't have government be a nanny", here even I can see a reason to regulate (whether by government, or ideally by an organization like PCI) minimum payments higher than a 30 year amortization schedule.