03:58pm Sunday 05 July 2020

Why zero per cent interest rates may not be tempting to consumers


Even though zero per cent is lower, consumers are likely to be lured towards the one per cent interest rate option, according to new research from Dr Mauricio Palmeira from the Department of Marketing at Monash University in an upcoming paper in The Journal of Consumer Research .

In the study, consumers were faced with a choice between a credit card with a zero per cent interest rate and one with low annual fee, 49 per cent of survey participants chose the low interest rate credit card.

This number jumped to 73 per cent when the interest rate was one per cent instead of zero per cent.

Dr Palmeira said that when businesses offer zero per cent, consumers get confused and avoid the offer.

Dr Palmeira cites the “principle of diminishing sensitivity” as a key reason for this behaviour. This theory makes the perceived difference between two quantities decrease as both increase by the same amount. For example, the difference between ten and 20 is perceived as larger than the difference between 110 and 120.

“Zero is a special value that prevents consumers from using relative comparisons when making decisions,” said Dr Palmeira.

“Zero makes us lose our reference point when we compare it to other values. Next to zero, any number seems larger, so relative comparisons are thrown out the door,”

“If a consumer is offered a credit card with a 25 per cent interest rate, and then offered a credit card with a one per cent interest rate, the gap between the two interest rates appear to be substantial,”

“On the other hand, if a consumer is offered a credit card with a 25 per cent interest rate and another interest rate of zero per cent, the zero can make consumers lose their bearings when it comes to determining the gap between the two,” said Dr Palmeira.

For more information contact Megan Gidley, Media and Communications + 61 3 9903 4843 or 0448 574 148 or Dr Mauricio Palmeira + 61 3 9903 1592 or 0425 380 478.

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