Psychology colors debt management

July 31, 2011 at 3:07 PM
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ST. LOUIS, July 31 (UPI) -- The best way to end debt is to make minimum payments except for one loan with the highest interest rate, but most tend not to do this, U.S. researchers say.

Cynthia Cryder, a consumer behavior expert at Olin Business School, Washington University in St. Louis, and co-authors Shahar Ayal, Moty Amar and Dan Ariely of Duke University and Scott Rick of the University of Michigan, designed several studies to examine how consumers manage debt portfolios.

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

In fact, no participant in their sample consistently used their cash to pay off the loan with the highest interest rate, Cryder says.

Because small losses impose a disproportionately heavy psychological burden, the authors say, eliminating a small debt may offer greater relief than making an equivalent reduction to a larger debt.

However, while it is attractive to close an account, that's not necessarily the best approach to minimizing your debt burden," Cryder says.

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