This is a subject we’ve covered before but now we have some scientific research that proves our worst fears about minimum payments on credit cards.

What Are Minimum Payments?

Minimum payments are listed on your monthly statement as the minimum payment you need to make to the credit card company to reduce your balance.

They are usually around 2-5% of the total balance and they don’t reduce your balance very quickly as this blog post from September pointed out.

In fact, for many people it would take many years at great interest costs to pay off the balance using the minimum as a guide. Often the minimum payment covers little more than the interest charges.

You can use this credit card reduction calculator to give you an idea of what you would need to pay to clear your balance.

University Research

A team of researchers from the University of Warwick, University of Essex, University College London and Boston College found that most people use the minimum balance figure as an excuse to pay off an amount that in actual fact does little good in reducing the overall balance.

What’s more, they found that displaying the figure on the credit card statements decreases the likelihood that a card holder will pay more than the minimum amount, they found.

In effect this reduces the amount that people pay off their credit card balances and actually keeps them in debt – clearly not a good sign in these harsh economic times.

In a press release the co-author of the study, Linda Salisbury said, “The mere presence of minimum payment information acts like an anchor on borrowers’ repayments, pulling them downward,”

Anchoring

Marketers often use such “anchoring” to make pricing of their goods seem more attractive – it involves exposing the customer to numbers so that they have something to compare with and make it easier to make a buying decision.

In this case the “anchoring” seems to be appropriately named because it is weighing credit card customers down with needless debt. It is believed that displaying a smaller number on credit card statements actually encourages people to pay only that smaller number.

The Good News for Australians

The good news for Australian cardholders is that, as of July 2012, new statement regulations will come into play and they will have to include the following:

• How much you will have to pay in extra interest payments by only paying the minimum amount
• How many years it will take you to clear your balance if you only pay the minimum amount
• How much interest you would save by paying more than the minimum payment and how much quicker this would clear the debt
• The complete charges by the credit card provider if you fail to make a payment by a certain date

This will make things a lot clearer for many people; but only if you take the responsibility to read your credit card statements!