Credit cards, How much should you pay down?

News Aug 23, 2018

By Paula Parpart

If you possess multiple credit cards, rationally, you should pay off the card with the highest interest rate (not debt!) first. However, instead, people do something that looks more like a balance-matching heuristic: People match the share of repayments on each card to the share of balances on each card (for example, with £400 to allocate in repayments, this would mean paying off £100 on the card that accounts for ¼ of the total debt across cards, and £300 on the card with ¾ of the debt). This strategy is harmful and completely ignores that cards have different interest rates.

The standard economic model would assume that people repay debt such that it minimizes the cost of borrowing, and therefore prioritize the debt with the highest interest rate. However, the exciting new work by scientists at the University of Warwick (Gathergood et al., in press; link below) reveals that instead people do balance matching. The behavioural economists studied how individuals repay their debt by using linked data on multiple credit cards from major credit card issues. They find that balance matching can actually account for more than half of the predictable variance in repayments, and outperforms other competing models (including some other heuristics that prioritize the highest debt), and that individuals who balance-match tend to stick to this strategy over time.

Studying how people make debt payments across a portfolio of cards has become a very relevant topic, because households more often now have multiple credit cards as well as loans (e.g., student loan) or mortgages, which require monthly payments.

Why do people display suboptimal behaviour that results in loosing money?

  1. Are people just not able to do the interest rate calculation?

Interest rate calculations are not always intuitive and multiple steps are involved to assess the overall cost of borrowing. First, one needs to know APR on the card (annual percentage rate), work out the monthly interest rate by dividing the APR by 12, then multiply the monthly interest rate with the balance (what you still owe) to work out the interest paid for a particular month. And, as the balance changes monthly with repayments, the interest paid also changes and the total fees will depend on how many months you take to repay (If you forgot how it works, have a look at one of the interest rate calculators

  1. Or are people simply cognitively lazy and opt for an easy balance matching strategy, thinking they have taken care of it?

These questions represent exciting behavioural science questions and only future research into people’s cognitive representations will tell what underlying mechanism can best account for people’s suboptimal behaviour.

The above is only one such example of suboptimal behaviour deviating from what is expected under a standard economic model. For example, people often opt for automatic minimum payments on their credit card debt (e.g., a credit card bill of £1,234.00 has a 1% minimum payment of £12.43 monthly), but this in fact results in people making less manual repayments which would get rid of a lot of their interest rate charges (Sakaguchi et al., 2018). This decision clearly has a very negative effect on the total interest charged over the life of the debt, yet people opt for a lazy strategy potentially not realizing how much money it costs them.

How can people’s repayment decisions be improved?

One of the key powerful things in behavioural science is to not only discover behavioural patterns in the data (e.g., such as large-scale transactional datasets) but to design and test behavioural nudges informed by these patterns (e.g., more on nudges can be found in Thaler & Sunstein, 2008).

One interesting question is whether people’s behaviour would become more optimal if they were reminded of the correct interest rate computation? This would tell us whether most people are in principle be able to work out the math and choose the rational option, or not. Or, taking the burden of the calculation away from the customer, why not simply display the projected cost involved for repaying in x number of months, given the credit cards’ interest rate and the current balance? This might help the customer compare their different credit cards easier and help them make a choice where to allocate most of their repayment.

Another simple nudge could be to make the interest rates more salient to see whether this draws people’s attention more towards the interest rate rather than the balance.

Either way, to understand what improves people’s repayment decisions across their portfolio of cards, one needs to run tests and evaluate what nudge is most effective.

Importantly, these behavioural nudges are more likely to be successful when informed by the large body of existing literature in psychology and behavioural science.

For example, Professor Neil Stewart, one of the authors of this work, suggests that these nudges will not be effective unless they make use of ‘prominent numbers’ (Sakaguchi et al., 2018). Prominent numbers were defined by Albers (1997) as powers of ten, their doubles, and their halves (e.g., 5, 10, 20, 50, 100, 200, 500, 1000, 2000, …). People have a special affinity for these numbers, which can be seen for example in how much they choose to pay in manual debt repayments: People are much less likely to pay amounts such as £99 or 45$ or $150 rather than £50, £100, or £200 (Sakaguchi et al., 2018). This might indicate that people are trying to minimize cognitive effort.

Crucially, this insight into people’s usual pattern of behaviour needs to be taken into account if one wants to effectively use nudges to help people make better decisions such as paying off the card with the highest interest rate first. For instance, a behavioural prompt might suggest to pay a prominent number, e.g., £500, on the card with the highest interest rate first.

More on this topic can be found in the original articles below.


Gathergood, J., Mahoney, N., Stewart, N., & Weber, J. (in press). How do individuals repay their debt? The balance-matching heuristic. American Economic Review. Available at SSRN:

Sakaguchi, H., Stewart, N., & Gathergood, J. (2018). When setting a default payment harms credit card holders. Available at SSRN:

Thaler, R. H., & Sunstein, C.R. (2008). Nudge: Improving decisions about health, wealth, and happiness.