Is psychology keeping you in credit card debt?

If you feel like you’re sinking under a pile of credit card bills and the odds are stacked against your ever getting out, you may be right.

You may have every intention of spending less and paying off your bills, but it may not be so simple. Researchers say when it comes to debt, psychology plays a vital role. Certain payment strategies and credit card policies affect our behavior and keep us mired in debt.

The good news: If you understand that psychology, you can use it to your advantage. We asked researchers to break down the reasons people fail to pay off debts and provide insights on how to turn things around.

How present bias can keep you in debt

People run up credit card debt for myriad reasons. Some don’t have an ample emergency fund, so an unexpected expense like a car repair leaves them in the red. Others turn to credit cards when a lengthy crisis hits, such as a job layoff or medical problem.

But there’s another explanation for why some consumers take on a lot of debt. New research on present bias shows many consumers are so focused on what they want now, they’ll use credit to get it at the expense of carrying debt.

Say you have a credit card and the minimum payment is $35 but you can afford to pay $100. Present bias might cause you to make the minimum payment so you have the extra $65 to spend today, despite the fact that your action will cause you to spend more in interest over time.

Because of present bias, “people who really want to reduce their debt may fail to do so because it is hard for them to follow through with a paydown plan,” says Theresa Kuchler, associate professor of finance at New York University’s Leonard N. Stern School of Business and co-author of the present bias study.

Why minimum payments can be costly

When it comes to paying off credit card debt, minimum payments are the industry’s answer to helping consumers stay on track. But focusing on minimum payments can be costly.

The minimum payment is the smallest amount a consumer can pay on the debt, and it’s typically calculated as a percentage of the total balance plus interest and fees. However, making minimum payments will keep you in debt for a longer period of time and cost you more in interest than if you pay a larger amount.

The Credit Card Act of 2009 required card issuers to show consumers, on their statements, how long it would take to get out of the debt if they only make minimum payments, as well as how much they should pay each month if they want to be debt-fee in 36 months.

The goal of that disclosure is to entice consumers to pay more than the minimum payment each month. But a recent study of credit card payment strategies shows that’s not always in a consumer’s best interest, particularly if they have multiple credit cards.

If consumers try to pay more than the minimum required on all their cards, it pulls money away from the card with the highest interest rate, says Samuel D. Hirshman, associate professor at the NHH Norwegian School of Economics and co-author of the study: “In our experiments, that wounded up being costly for our participants.”

Credit card statements can influence how much you pay

The way information is presented on billing statements can affect how fast we pay off our debts, Hirshman learned. When study participants were aware of their interest rates and how much they were spending in interest, they were more likely to want to tackle the cards with the higher rates.

But that interest rate can be difficult to find on many credit card statements, Hirshman says. Statements highlight the minimum payment information rather than how much consumers are spending in interest.

When people don’t see how much interest they’re paying, they may feel less urgency to prioritize the higher-interest debts, which ultimately leaves them in debt for a longer period of time.

The problem with focusing on total debt

Typical methods for paying down credit cards can also keep cardholders in debt, according to a Harvard Business School study of the repayment-by-purchase method. Consumers tend to focus on the total debt on a credit card. If they can’t pay the entire amount, they pay a portion.

By focusing on the total amount, consumers may not even remember what they bought and are currently paying interest on. As a result, researchers argue, cardholders are less motivated to pay off the debts quickly since they don’t know what has actually been repaid.

Choose a payment plan you can stick to

Successfully paying off credit card debt requires planning, discipline and persistence. Researchers offer the following tips to increase your odds of success.

Use the payment-by-purchase strategy

Research shows paying off individual purchases can be more effective than focusing on minimum payments. For example, if you bought a new suit and a tire, you might pay off the suit one month and the tire the next. Doing so gives you a sense of accomplishment and motivates you to continue to pay for other purchases charged on the card.

 “If you don’t have revolving credit card debt, paying off specific items probably isn’t that attractive to you because you’re like, ‘Well, I’ll just pay off the whole thing anyway,’” says Grant Donnelly, assistant professor of marketing and logistics at The Ohio State University Fisher College of Business and co-author of the repayment-by-purchase study.

But for those who can’t pay the full amount, he says, it’s more meaningful to say, “I paid off my shoes and I paid off this dinner out. And next month I’ll try to pay off this next thing.”

Writing down your purchases and crossing them off the list when they’re paid off might also give you a sense of triumph, Donnelly says.

Researchers found when cardholders used the repayment-by-purchase strategy, they often paid off items they felt the worst about, such as the dress they knew they shouldn’t have splurged on. That could help them get a better handle on past spending and possibly avoid making unnecessary purchases in the future.

Create a plan to offset present bias

If you put off tackling your credit card debt because of present bias, just being aware of your tendency to do so can make a difference. Researchers found those who understood the concept of present bias were more likely to stick to a payment plan than those who did not.

But there’s more you can do. You can come up with a strategy that makes it easier or more rewarding to pay off your debts today rather than putting it off, Kuchler says.

There are a number of ways to do that:

• Have your debts paid automatically, so you don’t have to think about it and there is nothing for you to physically do.
• Enlist a friend or family member to check on your progress. You’ll feel good when you can report that you stayed on track.
• Put your credit cards away, where they aren’t easy to access. It will be more difficult to charge things on them and run up your debt again.

Write down all your interest rates

Hirschman’s research shows knowledge is power. If you don’t know how much each credit card is costing you, it’s difficult to create an effective repayment plan.

“You have to know what all your interest rates are across all of the cards,” Hirschman says. Then you can determine which ones are costing you the most in interest. To save the most money, prioritize the ones with the highest interest rate, Hirschman advises.

Consider what motivates you

What motivates one person to pay may not motivate the next person. Consider what strategy would make you feel like you are accomplishing the most.

For some people, paying off the card with the smallest balance first will give them the sense of accomplishment they need to keep going. Others may find paying off individual purchases gives them more of a sense of progress. Still others feel motivated by paying down the card with the highest interest rate.

Whichever plan works for you, stick to it.

Schedule your repayments in advance

When you have multiple credit card bills coming in at different times in the month, it can be difficult to figure out which ones to prioritize and spend the most money on, Hirschman says.

Write down your interest rates and minimum payments, and determine how much you can pay in advance, he advises. Then follow your plan, regardless of when the bill arrives.

“You want to be putting yourself in a position to make each dollar go the farthest,” Hirschman says.

Bottom line

There are many reasons why people amass debt. For some, paying it off can be challenging, and new research shows psychology often plays a role in keeping consumers from succeeding.

However, psychology can also help consumers achieve their goals of paying down debt for good. Once you understand what motivates you to stick to a paydown plan, you’re on the way to being debt-free for good.