Paying Back Those Swipes

We survived swiping season. But, swipe away and you will (eventually) pay. Question is: is there one strategy for paying down that ghastly credit card debt that’s better than the rest? Remi Trudel, Assistant Professor of Marketing, says yes.

17192-marcom-shulamit-kahn-story-02Many Americans who are affected by the credit card ball and chain are left to concoct their own plan for taking them down. Where should you begin? Should you pay equally across all your accounts? Or should you attack one at a time? As it turns out, consumers are more motivated to pay off their debts, when they focus only on one account at a time. In a Harvard Business Review article, Research: The Best Strategy for Paying Off Credit Card Debt, Trudel further suggests that, people are more motivated to get out of debt not only by concentrating on one account but also by beginning with the smallest.”

He explains, “The Federal Reserve estimates that nearly half of U.S. households are unable to pay their credit card bills in full each month. These households owe more than $800 billion in card debt—an average of more than $15,000 per household spread across an average of four credit cards.”

Trudel explains in his article that he and his colleagues used anonymous data from HelloWallet, a company that serves Fortune 250 companies and their employees, which spanned a period of 36 months, included credit card information and spending, payments made during that time, and the outstanding balance for nearly 6,000 HelloWallet clients that have an average of 2.5 credit card accounts.

Together, Trudel and his colleagues found that individuals who focused their repayments on only one of their open accounts were more motivated to pay the debt and actually ended up repaying their debt 15% more quickly than those who spread their payments across all of their accounts. This “one-account-at-a-time strategy” led individuals to work harder and repay the debt more quickly. This is because, when paying on one account at a time, we perceive that we are making a greater amount of progress.

Trudel explains, “We tested a variety of hypotheses and ultimately determined that it is not the size of the repayment or how little is left on a card after a payment that has the biggest impact on people’s perception of progress; rather it’s what portion of the balance they succeed in paying off. Thus focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress – and therefore their motivation to continue paying down their debts.” 

Moral of the story is: start small. Trudel explains, “To the extent that a consumer’s debt accounts have similar interest rates, he or she should concentrate repayments first on the cards or accounts with the smallest debts, paying off those first.”