Why Don't People Manage Debt Better? - Deepstash
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How we intuitively manage debt

How we intuitively manage debt

Many people do not effectively manage their debt but juggle multiple debts with different terms and interest rates.

The most effective way to pay off debt is to focus on the loans with the highest interest rates first. However, research shows that consumers who manage multiple debts prefer to reduce the total number of debts rather than reducing the total of their associated costs, even if they will pay more in the long run.

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Psychological processes behind debt account aversion

  • The Prospect Theory suggests individuals are more sensitive to a loss than a gain of an equal amount. The urge to get in the black is so strong that people are motivated to pay off small debs without considering their interest rates.
  • The Goal-Gradient Theory supposes that consumers are more willing to make an effort towards small debt just to finish paying them off.
  • People do not take into account how interest compounds over time.

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How we can reduce our debt

  • We can set up automatic payments to the debt with the highest interest without regarding how much is owed on it.
  • We can consolidate multiple debts into a single loan. If you have five different loans with different interest rates, your loan servicer can consolidate each debt into one payment.

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