Credit Card Issuers Use Psychology in Debt Collection

By Debbie Dragon   

For many years, the credit card industry has enjoyed big profits, not from cardholders who paid their bills in full each month, but from the higher interest rates and fees charged to those who carried a monthly balance. In fact, since 1995, 40 percent of the credit card industry's income has come from cardholder fees, according to the New York Times.¹

A staggering 10.2 billion credit card solicitations were mailed in 2005, no doubt contributing to today's credit crisis, because nearly everyone who wanted a credit card got one, regardless of their credit histories.

Easy credit increased the industry's risks because it was difficult to determine which cardholders would carry a balance from month to month and which would spend up to their available limits and then default on the debt. To minimize their risks, credit card companies began creating thousands of different credit cards, each with its own credit limits, terms of agreement, late fees, penalties and interest rates. This wide variety of cards allowed the industry to give people different credit limits based on their risk level, and to charge higher-risk individuals the highest interest rates. This ensured that if some cardholders failed to pay their bills, the money made from those who carried a balance would compensate for the default risks posed by others.

Today, psychology-based studies and spending analyses have become sophisticated tools used by credit card issuers to predict how different customers will behave under different conditions and to better predict who's more likely to default on their credit card balances.

Many variables have been tested, including how the rate of credit card applications is affected by the color of credit cards and the size of the envelope that contains the application, and whether recent immigrants are better or worse at paying their credit card bills than native-born cardholders. As card issuers glean more information about various demographic groups and customer types, they continue to tinker with minimum payments and interest rates so as to maximize their revenue.

The analysis hasn't stopped there, though. You may be surprised to learn just how much your credit card companies know about you — what you buy with your card or where you use it, for example, can predict whether you'll pay your bill on time.

One of the leaders in the data-driven trend was J.P. Martin, the owner of a company named Canadian Tire (which sold a lot more than car tires). In 2002, Martin analyzed the information collected by his company by examining his customers' credit card transactions over the previous year. After analyzing the purchases and payment histories of customers, Martin was able to make a connection between the brands people buy and their tendency to pay their bills. He found, for example, that customers buying generic automotive oil were more likely to miss their credit card payments than those who opted for more expensive, brand-name automotive oil. He also found that people buying carbon-monoxide detectors hardly ever missed a payment, while those who bought chrome skull car accessories or pricey exhaust systems for their vehicles would eventually miss a credit card bill.

Martin also predicted how many credit card payments an individual using his credit card at a specific bar to purchase drinks would miss over a year's time. When Martin's findings were tested and compared to a cardholder's credit report data and their income levels, Martin's predictions were far more reliable. These findings gave birth to credit card "psychologists."

Using Martin's findings, mathematical fanatics began consulting with credit card lenders to build psychological profiles based on what people were using their credit cards to buy and where they were using them. With the economy still in the doldrums, credit card psychologists are in high demand by the credit industry for everything from identifying risky debtors to coaching bill collectors on how aggressive (or understanding) to be when making debt collection calls.

At some credit card companies, bill collectors are now called customer-assistance employees, and they receive training to respond to various life situations that customers share and the best means of collecting payment in different circumstances.

Footnote

¹ "What Does Your Credit Card Company Know About You?" New York Times, May 12, 2009