How you treat your monthly credit card bill might reveal as much about your personality as when you scream when under pressure or offer a seat on the bus to someone using a cane.
People’s bill-paying styles fit into categories. Some rush to write a check the minute they spot a bill in the mailbox. Others toss the envelopes aside, waiting until the last minute and even then, just make a minimum payment on their credit card debt.
The sort of person you are says a lot about how you handle credit, and the behavior patterns are something banks try to assess when they vet you as a customer.
TransUnion, one of the three personal credit rating agencies in the U.S., has names for the traits. It calls the pay-in-full (or almost in full) folks “transactors” and the payers who pay only the minimum balance “revolvers.”
Transactors versus Revolvers
In a 2013 study, TransUnion found that transactors have significantly lower delinquency rates than revolvers. Something else: not all revolvers are created equal. Those who pay more than the monthly card minimum are less of a risk than those who don’t.
Transactors constitute 40% of credit card customers. The rest, the revolvers, are a mixed group. Most pay something less than the full bill but more than the minimum. Only 20% are minimum-balance payers.
Many people use more than one card, so TransUnion created what it calls a total payment ratio (TPR) to determine how well people manage debt. The TPR sums a customer’s total monthly credit card payments and divides it by the total minimum due on all the cards.
TransUnion found that, with few exceptions, when an TPRs rise, delinquency rates on loans – credit cards, auto loans and mortgages – fall.
Though lenders always like to get their money back, they have mixed emotions about transactors. Much of the profit credit card issuers make comes from those who don’t pay off their balances. From a strictly monetary perspective, the best customer for a lender is one who pays every month, but carries a balance.
Credit Card Minimum Payment Trends
No one knows for sure why people approach bills differently. Obviously, the ability to make payments is key for many people, but a new study published by the National Bureau of Economic Research finds that between 9% and 20% of credit card customers pay the minimum even if they could afford to pay more. One of the study’s authors speculated that the minimum payment amount is usually prominently displayed on a monthly statement and that some customers might pay that amount out of habit.
The tendency to pay the minimum on credit card debt persists even after the 2009 enactment of the federal Credit CARD Act, which requires card statements to disclose how much you need to pay each month to eliminate the balance in three years.
That can be useful information for customers, but it doesn’t serve the interests of card issuers. Banks make money on interest, which might help explain why they’ve lowered minimum required payments. In the 1970s, minimums averaged 5% of card balances, but today they average 2%.
One encouraging sign for the last few years, at least from the customers’ perspective, is that people are more likely to pay off their balances every month. In its 2015 report on financial capability in the United States, the Financial Industry Regulatory Authority (FINRA) found that 52% percent of Americans who used credit cards in 2016 report paying their credit cards in full every month, up from 41% in 2009.
It also found that those saying that in some months they paid the minimum due decreased from 40% in 2009 to 32% in 2006.
Consequences of Paying Only the Minimum
For revolvers, delaying payment has consequences. It exposes them to dire financial risks if they lose a job, have a medical emergency or face some other financial problem that prevents them from making the minimum payment. It’s also expensive.
Say you have a $1,500 balance on a card with an 18% APR and opt to pay the minimum amount of $37 a month. It will take 160 months (more than 13 years) to repay the balance, assuming you don’t buy anything else with the card. The total interest you’ll pay is $1,792.52, which is more than the $1,500 you owed at the start.
But if you add $10 a month to the minimum payment each month, you can cut the repayment period to 44 months (less than four years) and will pay less than a third what you would have in interest.
Late fees, annual card fees and other charges can distort your financial situation badly. Annamaria Lusardi, director of the Global Financial Literacy Excellence Center at George Washington University, warned that borrowers likely will face even borrowing rates because they only pay the minimum.
“We identify what we call expensive behaviors,” Lusardi told InCharge. “If you have fees and are not paying more than minimum you’re going to be paying a higher interest rate. That is expensive behaviors. Things like that are going to result in increased interest rates on your cards and other loans and life suddenly becomes very expensive.”
If you’re a revolver who has dropped into a quagmire of massive interest and a repayment horizon stretching years into the future, it may be time to seek help. Consider contacting a non-profit debt management counselor. Working on a plan to clean up debt can be a great way of avoiding a financial catastrophe if something unexpected, like a recession, undermines your ability to pay in the future.