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Pattie Lovett-Reid

Chief Financial Commentator, CTV


Credit-monitoring agency TransUnion revealed in its new quarterly “Industry Insights” report Thursday that Canada’s total credit card balances grew 3.3 per cent in 2016 to $94.2 billion. For individual consumers, the balance grew to 2.3 per cent year-over-year. In the past, consumers with heavy debt loads were encouraged to pay off the most expensive debt first – the one with the highest interest rate or the one costing you’re the most. Add to that any extra money you might have could be sprinkled across all of your debt.

Well, it turns out that might not be the best course of action.

Simon Blanchard, professor of marketing at Georgetown University’s McDonough School of Business in Washington, D.C., has conducted timely research that explores the psychology behind how consumers choose to allocate their money between credit cards, for Canadians trying to get out of debt. This study was co-authored with researchers from the University of Alberta, University of Manitoba, and Boston University.    

The aforementioned TransUnion study found that although Canadians are using fewer credit cards than in the recent past, the debt has increased. This aligns with what Blanchard and his co-authors found in their study: Consolidating debt into a single lump sum account can be demotivational, as consumers aren’t seeing the progress as quickly as chipping away at the smallest credit card balance over multiple cards.

Additional highlights from Blanchard’s research include:

•  Paying the smallest credit card debt first allows consumers to see progress quickly which can better motivate them to continue chipping away at debt

• When consumers concentrate their repayments, perceived progress will lead people to work harder at getting out of debt (in a study, participants who concentrated on one debt at a time repaid debts 15 per cent faster);

• Evaluation of anonymous monthly credit card data – spanning 36 months for nearly 6,000 HelloWallet clients – found consumers who concentrated repayments on just one of their several accounts paid down more of their card debt than those who dispersed repayments equally across multiple accounts

• Concentrating repayments increases motivation, which can lead consumers to cut their spending and even pick up an extra shift at work.

Something to consider if you are looking to retire that debt sooner than later.