The Psychology of Collections

NYT Magazine humanizes credit card companies instead of consumers

Reporting on how credit card companies are coping as the number of customers in default grows, The New York Times Magazine fell into what I call the “devilishly clever” trap. This trap is sprung when a reporter delves so deeply into a particular process that, along the way of dissecting it, he or she forgets that it’s part of some larger thing that is actually quite malevolent. (This NPR report on “ingenious” cocaine smugglers who use submersible crafts is a good example.) This trap often presents itself when a reporter spends much time understanding how something works, and immersing herself in the process to such an extent that this newfound expertise and enthusiasm for the subject obscures the real-world ramifications of the story.

Such was the case with this Times Magazine piece on the credit-card industry. But, while the reporting delved deeply into industry practices, the plight of the consumers who were victims of creditors’ deceptive practices went unmentioned. Here are the nut grafs:

After two decades of almost constant expansion and profitability, card companies today are in deep trouble. Monstrous losses — estimated to top $395 billion over the next five years — are growing as cardholders, brought low by the recession, walk away from their debts. And Congress and President Obama are pushing for legislation that would make it much harder for companies to hike up interest rates and charge many of the sneaky fees that have been an easy source of revenue for years.

So credit-card firms are changing their business plans. Gone are the days of handing out cards willy-nilly and hoping that the cardholders who dutifully pay up will offset the losses from those who default. Today companies are focusing on those customers most likely to honor their debts. And they are looking for ways to convince existing cardholders that if they only have enough money to pay one bill, it’s wiser to pay off their credit card than, say, the phone.

Put another way, credit-card companies are becoming much more interested in understanding their customers’ lives and psyches, because, the theory goes, knowing what makes cardholders tick will help firms determine who is a good bet and who should be shown the door as quickly as possible.

One way these companies are figuring out “what makes cardholders tick” is by relying on psychology and data analysis culled from months or years of the consumer’s own purchases. As credit card companies profit models shifted from collecting annual fees, interest payments, and merchant fees, to penalties, late fees, and “silently skyrocketing interest rates,” data analysis helped companies identify customers who would provide more revenue by defaulting—not by being responsible.

And, this is where reporter Charles Duhigg fell in love with the process: To figure out how to maximize the profit from these cardholders, the companies sifted through customers’ purchase data to draw some nifty conclusions:

People who bought cheap, generic automotive oil were much more likely to miss a credit-card payment than someone who got the expensive, name-brand stuff. People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory or a “Mega Thruster Exhaust System” was pretty likely to miss paying his bill eventually.


Data-driven psychologists are now in high demand, and the industry is using them not only to screen out risky debtors but also to determine which cardholders need a phone call to persuade them to mail in a check. Most of the major credit-card companies have set up systems to comb through cardholders’ data for signs that someone is going to stop making payments. Are cardholders suddenly logging in at 1 in the morning? It might signal sleeplessness due to anxiety. Are they using their cards for groceries? It might mean they are trying to conserve their cash. Have they started using their cards for therapy sessions? Do they call the card company in the middle of the day, when they should be at work? What do they say when a customer-service representative asks how they’re feeling? Are their sighs long or short? Do they respond better to a comforting or bullying tone?

These are all neat anecdotes which, in sum, lead Duhigg and his editors to the headline, “What Does Your Credit-Card Company Know About You?” Which is, as it seems from the reporting, quite a lot. Based on the evidence Duhigg collects, all this data mining has been effective. One collector, trained in Abraham Maslow’s hierarchy of needs theory decides that a delinquent customer should be treated more firmly:

Santana’s classes had focused on Abraham Maslow’s hierarchy of needs, a still-popular midcentury theory of human motivation. Santana had initially put this guy on the “love/belonging” level of Maslow’s hierarchy and built his pitch around his relationship with his ex-wife. But Santana was beginning to suspect that the debtor was actually in the “esteem” phase, where respect is a primary driver. So he switched tactics.

“You spent this money,” Santana said. “You made a promise. Now you have to decide what kind of a world you want to live in. Do you want to live around people who break their promises? How are you going to tell your friends or your kids that you can’t honor your word?”

The customer agrees to pay back a greater sum of his debt. Which is fascinating, if not overly convenient, stuff. As the economy falls apart, vulnerable consumers are choosing between paying the credit-card bill or the electricity bill, and a collector’s tone can, perhaps, affect the outcome. But all that is secondary to the imbalance of information that consumers face. Just skim this Washington Post Q&A about credit cards. Consumers left and right complain about being duped by creditors:

Mount Air, Va.: I bought a Freezer from Sears on my Sears Mastercard (Citi). The first bill came in with a 28 day grace period but Sears had not entered the transaction under the special no payment/no interest for 12 months promo that I bought the freezer under. Second bill came in with promo noted but now the grace period had automatically dropped to 20 days (I called Sears to confirm this). Call me paranoid but I think they do this so that customers will miss the new due date and default on the promo allowing Sears/Citi to collect on fees. Will prohibiting this practice be part of the new rules?

Adam Levin: You’re not paranoid. It’s a given that issuers make more money when people miss the due date and end up losing the interest free promotion.

The Fed Rules that go into effect July 2010 will require issuers to mail statement at least 21 days in advance. Both the House and Senate bills address this as well.

Watch those due dates in the meantime!

And that’s the problem in Duhigg’s piece. While creditors are savvy and ingenious in the way they track data about their customers and train their personnel to make sure they can push the right buttons, consumers are tragically under-informed. And this imbalance goes sadly unmentioned in the article. Yes, creditors are devilishly clever, but cleverness and virtue are not the same thing. As the recession eliminates jobs, customers face ballooning interest rates allowed by fine print in complex contracts with clauses written in dense legalese. Because, unlike the creditors, they don’t have teams of analysts. Instead, consumers expect to rely on journalists to help them understand devious business practices and expose the devil in the details.

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Katia Bachko is on staff at The New Yorker.