The Psychologist is In

There is a pretty solid foundation in credit procedures on how to collect debt. Call, remind them of their commitment, let them know that there are consequences that could include seizure of property, loss of reputation, etc.

If you think about it, there is some psychology at work. You appeal to the debtor’s sense of obligation or pride, or make them worry about consequences. It is not sophisticated psychology for sure, but the collection industry is built around these practices.

So what other psychology is out there that could be useful to the collector or credit manager? There is a surprising amount of psychology around debt, the accumulation of debt, and how to set things up in advance to facilitate collection.

There is a psychological phenomenon called “anchoring”, where peoples’ judgment is impacted by arbitrary numbers. The online journal Science Daily discusses the 2009 paper by Dr. Neil Stewart (of the Department of Psychology at the University of Warwick, UK) called “The Cost of Anchoring on Credit–Card Minimum Repayments” where he examined the impact of minimum payment amounts in debtor’s decisions.

Stewart found that those who were planning to pay the entire balance were not impacted by the presence of a minimum payment amount, but those who were not intending to pay the full amount (38% of card holders, according to the study) more often than not opted to pay the minimum balance.

Furthermore, the lower the suggested minimum payment (which vary by credit card), the study found that the average actual payments were lower, even if the debtor could afford to pay more.

Do we as collectors employ this tactic? To a certain extent we do. When setting up a payment plan, best practices say to ask for a higher initial payment to establish commitment of the debtor. Essentially, we set a higher expectation for that first payment, and we do it because it works.

Another study called “Winning the Battle but Losing the War” published in the Journal of Marketing Research highlights consumers’ satisfaction with paying off small debts, even if there is larger or higher interest bearing debts in their portfolio. The psychology of why this happens is drawn from the psychology of decisions and goal pursuit – people are disproportionately impacted by small “losses”. When those “losses” are debts, people often elect to clear up small debts first, thereby creating a sense of progress.

While we as credit managers work to set a manageable credit limit that once reached the debtor can actually pay off ( hopefully all at once) it would be reaching to say we are taking advantage of the psychology around the preference for repayment of small debts. We are simply being practical, matching customer cash flow to expected debt. In fact the ‘Winning the Battle’ study suggests that this is a tactic that debtors will employ when they have multiple debts…and a credit manager would hopefully be able to identify and avoid those kind of customers in the first place!

Putting your mind to it, credit managers could come up with some clever ways to employ this information, and would do so differently for consumer customers than you would for commercial customers. The strategy on how to employ this psychology would flow from having a clear understanding of your customers, their cash flow and their business.

Ultimately this science suggests you make sure you set management credit limits that you enforce, and that when you set minimum payments or payment plans, don’t lowball.

It sounds like credit managers know their psychology!


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