You may be unwittingly piling up credit card balances due to a cognitive bias known as the “anchoring effect”. If you’re one of a rising number of Singaporeans with bulging credit card balances, don’t worry, a Debt Consolation Plan can bail you out.
There’s been several incentives designed to help credit cardholders maintain their credit accounts in good standings, yet many more are falling into bigger debt burdens. Even schemes designed to curb the worrying trend has had little impact. These include rewards, late payment fees, and high interest-rates, yet there’s increasing number of Singaporeans racking up more debts. This is confirmed by a report released by the DP Credit Bureau, which also reveals that this disturbing trend among young credit cardholders is worse among people aged between 21 and 30 years old, who are twice more likely to default on credit card balances.
It’s instructive to add that, a report by The Straits Times last year, reveals that just 5% of the population were responsible for a whopping S$288.4 million of unsecured overdue debts in Singapore. These debts were mainly acquired by means of personal loans and credit cards. It is unflattering that the debt total has rather increased by an additional 75% since 2011.
A Case Study Of The Anchoring Bias Effect
Speaking in general terms, you’re more likely to make use of the most recently learned information at your disposal for decision making. Our brains have a way of disregarding or relegating later information to the background with bias for what you learned or remembered first. That is the basic psychology of the “anchoring bias.” Let’s now proceed to learn how this is ensuring that more Singaporeans are falling into credit card debt.Let’s use numbers for reference. This effect basically lets you refer to the number you first see or remember, even if those numbers are unrelated.
In a study done to understand the anchoring bias, some MBA students of MIT were first asked to write down the last two digits of their respective Social Security Numbers (SSN), they were then later asked to make bids of how much they’re willing to pay for some random items, the values of which they weren’t told. This test threw up some intriguing correlations.
It was found that the students’ individual bids were related or influenced by the last 2 digits of their SSN which they’d written down. In a nutshell, those with higher last two digits bid higher for the same particular items which those with lower last two digits bid lower for.
Let’s now try to connect the “anchoring bias” effect to the issue of growing Card debt problems among Singaporeans. Because cognitive abilities and biases surely affect all of us. First, there are two sets of numbers I’d like you to note. The credit card limit, as well as the minimum monthly payments.
Singaporeans Are Likely To Spend More Due to Anchoring Bias And Credit Limit
Most Singaporeans make spending decisions based on, NOT necessarily how much they have, but also on how much they have ACCESS to borrow. This is the meeting point of anchor bias and credit limit. That’s what in most cases decide what you find affordable or otherwise.
Consider two case scenarios about spending on a particular item.
Case 1: Your take home pay is S$2,700 per month. And you need to buy a dream appliance or gadget costing S$1,899. Are you likely to tag the gadget/appliance as:
A). Affordable? Or,
Case 2: Asides the same monthly take home of S$2,799, you also have a credit card limit of S$12,000. Would you label the same appliance/gadget as:
A). Affordable? Or,
If you chose option A in the second scenario, then you’re more likely to incur large credit card debt. Remember, as stated earlier, your decision isn’t only based on how much you necessarily have at hand, but also on how much you can access through credit.
Higher Credit Card Interest, While Anchoring On The Minimum Payment
The second of two numbers we were asked to keep an eye on earlier is the minimum payment. When outstanding balance gets to a level where it can no longer be cleared on a monthly basis, you’re more likely to be distracted by the minimum payment indicated on your printed statement. This is result of a study by The University of Warwick.
The study further revealed that, even participants of the study who were in better financial situation to pay more per month were mostly paying the indicated minimum. There was however a change in monthly payment patterns for credit users when this minimum payment was raised or removed entirely. In both cases, minimum payments automatically increased.
The researchers further altered the minimum payment to allow a more flexible payment, it was discovered that card members also altered their payments to anchor on the new base minimum.It is therefore instructive to note that many Singaporeans who should be paying lesser interest over a shorter time frame, are unwittingly and unnecessarily paying more interest rates for rollover debts due to “anchor bias”
How To Exploit Anchoring Bias To Your Advantage?
If you must overcome the negative effects of anchoring bias on rollover debts, you must teach yourself to exploit the positive side of it. First, you need to make a decision to pay off within a maximum period of 12 months.This means that you have to structure your payments for the rollover debt to be higher than the stated minimum payment, to one which enables convenient monthly debt pay off.
Here’s a simple but effective working formula to employ:
(Current debt balance x 1.yy) / 12. Where yy = annual interest rate.
Assuming that outstanding credit card debt = S$10,000
Annual interest rate = 28%
Then to conveniently pay off debt in 12 months, and using the above formula, you calculate as follows:
First step: S$10,000 x 1.28 = 12,800 (total to be paid)
Second step: S$12,800 / 12 = S$1,066.66 (minimum monthly payment)
Following this basic principle will ensure that your debt is paid off in 12 months, or less. Should you find this a bit inconvenient for your particular case, you could alter the format to suit a slightly longer payment period of up to 24 months. But remember that the more the number of months, the higher the monthly interest you’ll end up paying eventually. This final figure should be your new anchor. Disregard the stated payment minimum. You should write this somewhere you’ll always see it when opening your bill, as a reminder.
A Simple Hint To Responsible Credit Card Use
Responsible borrowing isn’t based on how much you’re allowed to borrow, but how much you can borrow and conveniently repay. Not realizing this point is why many Singaporeans find themselves in unsustainable credit card debt.
You’re able to avoid the trap by determining how much you can afford to spend per month (based on monthly income), irrespective of whatever is stated as your credit card limit. You should then stick it to your card as constant reminder. This should be the REAL credit limit, the one on your statement should be seen as a VIRTUAL limit.
Lowering Your Interest Removes Payment Doubt
There’re those whose credit debt are so much that it seems unsustainable. Especially those with debts more than 12 times their monthly salary. If you’re in this category, then you’ll need a Debt Consolidation Plan (DCP), the latest debt management service offered by Citi.
This tool enables you to lower your interest in order to help lower your monthly debt payment, for better cash flow management. As against 25% average interest rates per year for credit cards, interest on DCP by Citi are pegged at 10.5. This lets you save more on monthly interest payments while reducing your total debt burden.
This facility also guarantees you some level of certainty:
>> You’re able to come up with emergency savings
>> More savings on interest payments mean you have better cashflow to meet other financial obligations
>> It lets you get revolving credit facility worth one month salary, to augment your daily needs
> You’ll be allowed to choose a repayment period ranging from 3 to 7 years. This can be the effective, comforting motivation you need to become debt free within a specified time frame.
If you know anyone who face difficulites in monetary aspects, you may wish to direct them to Easy Credit Directory