Using a credit card can be a great move in the right circumstances. Large, one-off purchases can be easier to pay off using this type of credit. Also, by taking advantage of account perks like cash back and travel miles, people can make money with a credit card.
However, around 113 million credit card accounts – three in every 10 accountholders – carry their balances from month to month. This costs cardholders millions in interest payments and places Americans under financial pressure.
The latest numbers came from the National Bureau of Economic Research. Co-authors, Jialan Wang and Benjamin Keys say that a new phenomenon known as “anchoring” is leading many cardholders to pay off only the lowest amount each month. Anchoring means that people focus on the first bit of information they see. Often, this is the “minimum amount due” emphasized on their statements. Instead of considering paying off the entire bill, people concentrate on simply paying the smallest amount, which, at an average of just 1-2 percent of the remaining balance, means that interest soon begins to mount.
The researchers of the paper suggest that between 9 and 20 percent of accountholders have the means to make higher repayments – paying off their balance quicker and saving money on interest. According to Keys and Wang, “Paying more would speed up the repayment period and sharply reduce the cumulative interest paid. This behavior isn’t isolated to a small part of the credit-card population. It’s surprisingly universal.”
This article was provided by our partners at moneytips.com.
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