Thread by @finshots

Does your credit card statement nudge you into debt?

A thread.

Credit card companies don’t want you to pay your bill in full.

They don’t want you to not pay at all either.

Between these two extremes is their sweet spot. If you don’t pay your bills in full and tend to carry a balance, you are what companies call a revolver - and you help the credit card companies make most of their money. How?

Well, your monthly statement has three figures that need immediate attention -
1. The payment due date
2. The Outstanding Amount
3. The Minimum Amount Due (MAD)

Now you might ask what this MAD is all about. It’s basically your credit card company saying - “Look, you don’t need to pay the bill in full. Just pay 5% of it and keep using your card as is.”

But as helpful as it sounds, this is a trick used by them to make more money off of you, since the outstanding amount continues to accrue interest.

In an experiment conducted by Warwick Business School, a group of volunteers were sent mocked-up credit card statements with a balance of £435, first with a MAD of 1.25% and then without a MAD.

Interestingly, removing the MAD had a dramatic effect with the average repayment increasing by 70%, thus providing evidence that the MAD has what you call a strong anchoring effect.

Anchoring happens when the presence of irrelevant information influences your decisions. In this case, you get too hooked on the MAD, since it is the least you have to pay to ease your burden temporarily.

And the minimum payments you make are a drop in the ocean of debt you’ve spiraled on.

In such situations, it's easy to slip. So when you do, know that it’s not a personal failure.

It is how the whole game was intended to be.

And that’s why when it comes to credit cards, boring is best - pay your bills on time, do not carry a balance, and do not buy more than you can afford.

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