Analysis: the psychology of financial decisions means we often make expensive mistakes when it comes to choosing loans and credit cards
The minimum repayment on your credit card Most banks set a minimum amount to be paid off a credit card every month which is usually somewhere around 2 to 5% of the balance. Psychologists have shown that many people get 'anchored' by this amount, which means that they see it as a recommended payment and pay only that amount and no more.
This is a big drain on their finances because they get charged interest on the rest of the balance every month and means they are saddled with more expensive debt for longer. When the minimum repayment is removed, people actually pay more off their balance every month, not less, and end up debt-free earlier.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences Shorter loans cost less than longer loans if the interest rate is the same. In our experiment, just seeing a loan calculator with an initial setting of five years instead of one year would have cost each person €470 more on average if they were taking out a €10,000 loan. That’s a lot of money down the drain because of one setting on a calculator.
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Source: IrishTimes - 🏆 3. / 98 Read more »