The Psychology of Debt Collection

What does the field of psychology have to say on how to collect a debt from your customer? 

You may not think it has much to offer.  But you would be wrong.

Consider what psychologists call the “anchoring effect”.  It’s a simple concept.  If you give a debtor a minimum amount that has to be paid to the account, then the debtor is more likely to pay exactly that amount rather than a higher number.

We see this all the time with credit card bills.  The credit card company sets a minimum payment to be made to the account to allow the debtor to still maintain credit with the card company.  There are those debtors who will make payment in full and thus maintain no balance and pay no interest.  However, there are a significant number of debtors who choose to pay exactly the minimum amount set out by the card company.  The debt balance continues to the next month and the credit card company begins to collect on a massive interest debt as well.

Dr. Neil Stewart of the Department of Psychology at the University of Warwick, UK, published a paper in Psychological Science in 2009 called “The Cost of Anchoring on Credit–Card Minimum Repayments”.  His findings were as follows:

– if a minimum payment amount was set out, then debtors who plan on making only a partial payment were more likely to pay that exact amount rather than a higher number.

– those who plan to pay the bill in full are not affected by a set minimum payment, as they plan on paying the bill in full regardless.

So what is your goal in recovering debts from partial payers – to recover payment from that debtor quickly or allow the debt to linger so that you collect interest as per your repayment terms?

If you want to let the debt continue to collect interest, then set a minimum payment to be made each month that gives you principle recovery and also allows interest to accumulate.  Whatever the minimum amount is that you set, the science of psychology will tell you that this is the amount that your malingering debtor is most likely to pay.

Paul H. Voorn, Associate, Andriessen & Associates Prof. Corp.