How Your Credit Card Statement Is Keeping You in Debt
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Since 2010, there has been an important change to your credit card statement. In addition to your minimum payment, your overall balance, and your due date, you can also now find some fascinating (if by fascinating you mean depressing) information about how long it will take you to pay off your balance if you only pay the minimum.
While anyone with a calculator and 10 minutes could easily determine that same information, the 2009 Credit CARD Act required lenders to start providing their customers with the cold hard facts. This is because the average consumer not only says a big, fat "No, thank you," to the opportunity to do extra mathematical calculations, we are also under the false impression that making minimum payments was more than enough to get out of debt in a reasonable time frame.
And therein lies the real problem with owning a credit card. It's easy to forget that everything the bank does is geared toward making the most money possible off of each and every cardholder. Your bank is working double time to use psychological trickery in order to get you into debt, because it makes them more money.
In particular, your billing statement is a treasure trove of traps for the unwary cardholder. Get out your latest statements and see which methods your bank is using in order to either get you or keep you in debt. (See also: Why We Take on Credit Card Debt)
1. The Minimum Payment
When you open any bill other than a credit card statement, the amount due is the same as the total due. But credit cards helpfully offer to let you pay as little as 2% of your total balance in order to satisfy your payment. They're not doing this because they're nice guys — only paying the minimum means you owe more.
Granted, this is the sort of thing that we should all know by now. But if that were the case, 2009's Credit CARD Act would not have required inclusion of the minimum payment consequences on every statement.
The big problem is that a minimum payment amount can affect how much you decide to pay each month. By providing you with a lowball number, your lender is using the effects of anchoring — a cognitive bias that causes you to be heavily influenced by the first piece of information offered, even if it's clearly unrelated. For instance, a study examining the influence of implausible anchors found that participants who were asked if Gandhi was older or younger than 9 when he died estimated his age at death to be 50, whereas participants who were given the anchor age of 140 estimated his age as 67. (He was 78 when he died, by the way.)
The implications of anchoring are pretty clear when it comes to the bank offering you a minimum payment amount — you are more likely to pay less than you would if you were simply told how much you owed. Even if you do not take the bait in paying only the minimum, you are still more likely to pay less than you otherwise would. It's a win-win for your lender.
2. Available Credit
Every credit card statement also makes sure to inform you of exactly how much credit you still have available. This is another number that you could easily arrive at yourself — and generally without having to break out the calculator or even count on your fingers and toes. So why does your lender feel the need to share this information with you? Because of a cognitive bias called the framing effect.
Basically, the framing effect explains why you can have different reactions to the same information based upon how it is presented to you. For instance, telling someone their venture has a 50% chance of success is much more likely to get them excited about going forward than telling them there's a 50% chance of failure — even though you have told them the exact same thing.
Providing the available credit on your statement frames your debt in a very specific way. Instead of thinking "I owe so much!" the mere presence of the available credit amount makes you feel like your debt isn't so bad. In many cases, cardholders will see the number representing their available credit and feel comfortable going ahead with charging more. There's plenty of money left, after all.
Of course, it's not as simple as our irrational brains make it. Not only will you have to pay back everything you've charged, plus interest, but using too much of your available credit can really negatively affect your credit score. Our brains are wired to make quick decisions based on whatever information is available. So knowing that you still have $4,000 before reaching your credit limit can be enough to make you say "why not?" to the next spending temptation.
3. Convenience Checks
I'll come right out and say it. Convenience checks — those handy-dandy checks that arrive with your billing statement that you can use for any payments when you would normally write a check — are evil. Evil, like the fruits of the devil. You should hear Darth Vader's theme song when you open an envelope with these bad boys in them.
Convenience checks capitalize on the fact that most consumers rarely read through fine print. Because if you did read through it, you would find the checks are about as convenient as a Nigerian email scam.
First, using the checks often appears to be no different from swiping a credit card. It's drawing on your line of credit, after all. But your lender actually treats convenience checks as cash advances, no matter what you use the check for. But cash advances have higher interest rates than credit card purchases — sometimes as high as 20% or more. Yes, the information about the higher interest is available to you, but only if you go looking for it.
In addition, you will also generally pay an upfront fee for the privilege of writing one of these checks — usually 3% to 4% of the amount you are borrowing via convenience checks.
If you're not convinced yet, don't forget that your lender still isn't done squeezing every last drop of money out of the convenience checks. When using one of these checks, you generally do not have an interest-free grace period like you do with credit card purchases. So even if you plan to pay off your bill as soon as it arrives, you'll find that you've been accruing that additional interest from the moment your check was cashed.
When it comes down to it, convenience checks are taking advantage of our inherent laziness. It's easier to write one of these checks than it is figure out where our budgeting went wrong when rent is due and the checking account is empty. Using these checks is simpler than getting more checks from our bank when we've run out. We'll take note of the page of fine print legalese, but refrain from reading it because it's just too much to take in. In short, lenders are counting on us being lazy and uninformed.
When you receive these checks in the mail, shred them immediately and back away slowly. You don't want to be seduced by the power of the Dark Side.
Beating Credit Cards at Their Own Game
We all know that we should be paying off our credit card in full each month. Unfortunately, that's not always possible for every cardholder. But even for those borrowers who are carrying a balance, it is possible to avoid being played by lender tricks and our own psychology.
First, personally keep track of how much you owe. If you know what your balance is without having to look at your statement, you're much more likely to come up with a rational payment amount without being affected by the minimum payment anchor number.
Knowing your balance is also a good way to avoid being tricked by the framing of your available credit. You will keep your total debt in mind throughout the month, which will help to keep your focus where it should be — on what you owe, rather than on how much more you could spend.
Finally, just don't use convenience checks. No convenience is worth their outrageous cost.
Ultimately, it is up to cardholders to spend and pay responsibly. It is a mistake to think any lenders have your best interests at heart, even if they are cleaning up their act somewhat since the Credit CARD Act of 2009.