Debt management psychology hurts consumers

ST. LOUIS, Jan. 8 (UPI) -- Because small losses impose a disproportionately heavy psychological burden, U.S. researchers say people prefer to pay off smaller debts first.

Cynthia Cryder, an assistant professor at Washington University in St. Louis, said it's undisputed that the best way to tackle debt is to pay down the loan or credit card with the highest interest rate first.

"However, our research finds that people really like closing accounts," Cryder said in a statement. "They will close a small debt account with a low interest rate at the expense of paying down a larger loan with a higher interest rate."

Cryder, Washington University colleagues Shahar Ayal and Moty Amar; Dan Ariely of Duke University and Scott Rick of the University of Michigan, designed several studies to examine how consumers manage debt portfolios drawing on prior work about the psychology of decisions and goal pursuit.

The article, "Winning the Battle But Losing the War: The Psychology of Debt Management," published in the Journal of Marketing Research, found throughout a series of debt-management experiments the participants consistently paid off small debts first, even though the larger debts in the study had higher interest rates.

The researchers called this phenomenon debt account aversion.

"While it is attractive to close an account, that's not necessarily the best approach to minimizing your debt burden," Cryder said in a statement.