Debt-collectors and credit card companies: the psychologists of predatory lending

The NYT has an in-depth look at the pop-psych training that bill collectors are getting, using profile data sucked out of card histories to figure out how to get inside debtors' heads and get them to cough up money they can't afford. This is driven by the long-term strategy of offering cards to poor credit risks on the grounds that they'd be apt to get into debt and cough up huge amounts in interest payment, unlike well-heeled yuppies who pay every bill on time.

The exploration into cardholders' minds hit a breakthrough in 2002, when J. P. Martin, a math-loving executive at Canadian Tire, decided to analyze almost every piece of information his company had collected from credit-card transactions the previous year. Canadian Tire's stores sold electronics, sporting equipment, kitchen supplies and automotive goods and issued a credit card that could be used almost anywhere. Martin could often see precisely what cardholders were purchasing, and he discovered that the brands we buy are the windows into our souls -- or at least into our willingness to make good on our debts. His data indicated, for instance, that 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...

To see how one company transforms thousands of low-paid employees into telephone psychiatrists, I attended a day of Bank of America's four-week training program at the company's Delaware offices. (I was allowed to attend on the condition that I neither identify nor interview the trainees during the course.) At the front of the classroom, a poster explained the company's "Customer Delight Model." The trainees were supposed to "provide a delightful opening," "employ delightful words," "acknowledge and empathize" and "personalize with a POWER close." They spent the morning discussing hypothetical cases, like a cardholder with twins whose husband announced he had fallen in love with another woman. He handed over divorce papers, had a moving truck outside and in short order took over the house and left the cardholder with two kids, only $400 a week and a ton of credit-card debt.

What Does Your Credit-Card Company Know About You?

• [TheMadLibrarian]

  I’ve been following the commentary around predatory credit card practices for some time, and right now the system appears to be cannibalizing itself by penalizing the people who are its most faithful and reliable customers. CC companies have started randomly raising the interest rates on users who consistently pay on time (although not always the full balance) to cover their previous lapses in judgment. The CC companies are also instituting an entire flotilla of new fees, many of which are interlinked, so that a fee in one area may trigger additional fees in a chain reaction. There have been scores of better analyzed and written articles about the rush to further burden card users with sneaky ways to extract more lucre.

  The point is that a large and growing number of people are only one or two accidents away from major financial trouble, if not bankruptcy. There are ways to plan financially for some emergencies, but not all, and a credit card safety net is the easiest for many people to acquire. Trouble is that many cards should now be rebranded with names like Charlie the Thumb; once you fall into one of their traps it’s hard to extricate yourself.

• [Inkstain]

  “Controlling factors of the societal type you appear to be advocating depend on vagaries that cannot be codified or regulated and thus, inevitably, wind up as moralistic tyranny of the sort that (i.e.) keeps alcohol from being sold on Sundays in certain parts of the country. In other words, you don’t like something so you think other people should be stopped from doing it. That’s fine, and I think we all have social preferences along those lines, but it’s also a good way to get punched in the nose.
  ”

  And I’m sorry, but that’s just a blank argument used for “X shouldn’t be regulated.”

  If we followed that principle, there’d be no laws at all.

• [Tenlow]

  @13

  Where do you draw the line as to what shouldn’t be saved for? Not everyone has the ability to keep a massive “just in case” warchest for everything that could possibly happen. Most people I know who aren’t rich enough to not worry where their money is going to come from have an “emergency fund” with a little money in it. Transmission on the car goes out? Pay from the emergency fund. Need a new roof after that? Take what’s left from the emergency fund and buy some really cheap bowls to catch the dripping water while you wait for the emergency fund to be replenished over the next six to eight months, OR put it on the credit card.

  For the people who live within their means but only just, credit cards are the emergency emergency fund.

• [Halloween Jack]

  I am not at all surprised by this, and in fact am rather shocked that it took someone until 2002 to get around to making the connection.

• [Inkstain]

  Hooray, BB finally hit on an issue I’m personally outraged about :) (not a dig at their choices, just that we all have our own pet issues).

  If a product exploits a flaw in human nature to the detriment of society, it’s a bad product. Period.

• [Takuan]

  Remember the idea of picking one oil company a week to punish by boycotting their branded gas stations to protest gouging?

  Organize to pick one credit card company for everyone to mass-default on and see what they do. It’s the old story of “he’s only got six bullets and there are a hundred of us”.

• [Takuan]

  if enough people decide they don’t want to play any more and just default, the credit rating bogeyman will die with the usurers and loan sharks. Perhaps a new community based, micro-credit model will emerge but you can bet that the credit card companies ARE NOT essential to continued human existence. Like gas guzzling cars, they had their run. Time for change.

• [doggo]

  Loan sharks with databases.

  http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/

• [Svenski]

  “…unlike well-heeled yuppies who pay every bill on time.”

  Come on, Cory. I’m neither well-heeled nor a Yuppy, yet I always pay every bill on time.

  Many of my Yuppy clients are in way over their heads and are always getting late payment.

  While credit card companies are scum, nobody ever forced a cardholder get a credit card in the first place.

  It’s called “personal responsiblity”.

• [monstrinho_do_biscoito]

  i actually have a poor credit rating simply because i almost never use credit cards and apart from a mortgage and a student loan have never been in debt

• [toolbag]

  Novel concept: do without, if you can’t pay for it outright then don’t get it.

  Has everyone in the US caught some kind of behavior modifying virus that forces us to spend money on anything that catches our eye? I’ve got no love for credit card companies but some of the cc company “victims” I’ve read about were spending foolish amounts of money on stuff they didn’t need.

  I know that’s not what the article is really about but….. Sorry, seeing people bring misery on themselves like this bothers me.

• [Anonymous]

  . This is driven by the long-term strategy of offering cards to poor credit risks on the grounds that they’d be apt to get into debt and cough up huge amounts in interest payment, unlike well-heeled yuppies who pay every bill on time.

  As someone who works in the credit risk department of the credit card department of a bank, this is certainly not true of us. We try very hard to model the possibility of someone going bad, and if they have a high probability, we exclude them

  Not everyone in this business is out to get the consumer.

• [Anonymous]

  Fascinating and horrifying.

  As a college student I do not yet have my own credit card account, but I hope to someday emulate my parents, nightmare cardholders who always pay the entire balance every month.

  I will have to ask them about their tire-buying habits someday.

• [Inkstain]

  “That’s how a lot of individual toxic debt happens…not from making bad decisions willy-nilly, but from making the only realistic decision in a bad situation.”

  More often, it’s the only decision they know how to make in a bad situation. If consumer education wasn’t so abysmal, there’s a lot people could do even in the direst of circumstances.

• [ndollak]

  It’s worse. I’m getting harassing phone calls from Bank of America and a collection agency claiming that I owe over $100,000! I don’t have any accounts with BoA, yet they have my name, address, telephone number and social security number, and it’s supposedly connected with this account. This has ruined my credit rating, which used to be exemplary. The bastards. The weirdest thing about it is that they claim that I was paying my bills until January.

• [Brainspore]

  Remember the idea of picking one oil company a week to punish by boycotting their branded gas stations to protest gouging?

  Those boycotts were organized by people that clearly didn’t understand either the way petroleum is distributed or how boycotts are supposed to work, and their efficacy reflected that. I imagine such a selective boycott of credit card companies would turn out much the same.

  The problem is that it’s almost impossible to participate in modern society without a credit card, or at least a debit card. A wholesale “boycott” of the system would be a Herculean task and anything less would be ineffective.

• [jjasper]

  Sadly, I can’t raise rates in the same way credit card companies do if business I’ve done work for doesn’t pay me until three months after they said they would.

  It’s funny how the market punishes consumers who’re deadbeats, but does absolutely nothing to help contractors who’re owed money by deadbeat corporations.

  Almost as if they had more influence in how laws were written.

• [Inkstain]

  @7 you can’t write into the contract before it’s signed that the rate will go up if the payment isn’t made in a certain timeframe?

• [urshrew]

  Psychologists should do a study on people who create such predatory lending practices. Oh wait, They already, did.

• [Moriarty]

  I guess I fall in the “well-heeled yuppy” category, because for years I’ve used credit cards to pay for pretty much everything (because they’re very convenient and improve credit score), and I have yet to pay a single cent in interest or fees, because I never spend more than I have, and I have never gone a full month without paying it off completely online. If you want to hurt the credit card companies, I suppose you could do what I do, which would be more effective than a boycott, since I imagine they actually lose a fair amount of money on me via processing costs and interest-free loans. Credit card usage is not synonymous with financial irresponsibility (it’s just how they make their money).

• [Anonymous]

  Human behavior falls onto a spectrum. Certainly one axis of that spectrum is . . . call it “impulsiveness” vs. “deliberateness” (or “Ant” vs. “Grasshopper” if you’re a fan of Aesop). Martin & Co. found a way to distinguish (with fair precision) where an individual falls on that scale. That information can be used against the individual. I don’t know about anyone else, but what I find most offensive is the transmutation from a business agreement to a con-game (in the sense that a con always involves [1] disparity of information, and [2] the party with less information is unaware of the disparity).

  I have to wonder how many of the Customer Assistants get dunning phone calls, themselves?

• [Anonymous]

  I think categorizing smart and/or well-educated people as “well-heeled yuppies” detracts from the point.

  Certainly the most financially sophisticated people I know aren’t yuppies, and never have been. I’ve seen yups go bankrupt, too (after which nobody calls them yuppies any more).

• [Anonymous]

  @8 “you can’t write into the contract before it’s signed that the rate will go up if the payment isn’t made in a certain timeframe?”

  You can, and you can specify attorney’s fees and debt collectors’ costs fall on the deadbeat corp to pay, but a collection agency will tell you that it’s entirely optional for them to listen, and you’re on the hook for the collectors’ share no matter what.

  Also, have you ever tried to collect on a judgement against someone who really doesn’t want to pay?

• [Anonymous]

  @ #10 MORIARTY

  Credit card companies also get paid by the merchant by taken a fixed percent of each credit card transaction. You’re lower profit but not a loss.

• [Anonymous]

  What they seem to have gotten wrong was that it is a matter of causation not correlation. I had never missed a payment until I bought that chrome skull hood ornament for my Civic. Now I do all the time. Finally I have the answer. Time to buy felt furniture skid pads. Thanks BoingBoing!

• [Thorzdad]

  Novel concept: do without, if you can’t pay for it outright then don’t get it.

  Many people get into credit card trouble by having to resort to the cards in order to pay for large, unexpected expenses. Transmission goes out in the car and you don’t have the $3,500 for the repair? Gotta put it on plastic. Your kid needs medical tests and you don’t have insurance? Or the insurance you have applies the cost of the test to your deductible, making you pay the costs yourself? Plastic. House needs a new roof or the furnace craps out and you don’t have $4,000 lying around? Plastic.

  These things add-up, especially if you don’t have an income that would allow you to pay the charges off at once. It’s not always a case of “flat screens in every room and a vacation in Mexico” as the card companies and their water-carriers would have you believe.

• [Anonymous]

  “The problem is that it’s almost impossible to participate in modern society without a credit card, or at least a debit card.”

  No, it really isn’t. I went without one for six months, and I only added a prepaid debit card because it’s slightly more convenient for a couple of my bills.

• [Inkstain]

  @10

  The credit card companies are still making a ton of money off of you. They take 1-2% of every transaction from the merchant as well.

• [Inkstain]

  @11

  As someone who went through some pretty awful financial circumstances (relative to USians, not so much relative to the world), I know exactly how that is and I sympathize.

  But at the same time, those aren’t “unexpected” expenses, those are expenses the people chose not to plan for so that they could temporarily afford a higher standing of living.

• [Takuan]

  just have one sacrificial family member be the credit card goat.

• [Moriarty]

  Ah, yes. Forgot about the fees the merchants pay. Ok, so they still get some money because of me, just not *from* me. I wonder whether I represent a net gain for them.

• [nosehat]

  @#27: “…unlike well-heeled yuppies who pay every bill on time.”

  Come on, Cory. I’m neither well-heeled nor a Yuppy, yet I always pay every bill on time.

  I also pay my full balance on time every month, and I really don’t think I’d be identified as a “yuppie” by anyone.

  I wonder what the “typical” profile is for the person that uses a credit card, but never pays interest/fees?

• [sonipitts]

  I have to second Tenlow’s response re: credit cards being the emergency fund.

  For most of my life, I’ve made well below the poverty rate, and am only now getting myself into a position to be able to build an emergency fund…which of course gets completely depleted every time there’s an emergency, leaving me hoping there’s not another one on the way for the several months it takes me to build it back up.

  Before now, the credit card was the emergency fund, as Tenlow says. And the health insurance. And so on. We simply didn’t make enough money to cover the bills and have enough left over to build a fund. And when I was a kid, Mom (single parent of three) often made less than our bills and expenses. So we often wound up playing “eeny, meeny, miney, moe” with paying due bills, and there was certainly nothing left over to save above and beyond that.

  At that time, $300 might as well have been $3 mil if something went bad. So the credit card became grocery money and gas money and school supply money when the paycheck couldn’t cover it. Yeah, she (and I, once I was on my own) knew it wasn’t a great choice. But it was either that of do without food, work transportation or medical care.

  That’s how a lot of individual toxic debt happens…not from making bad decisions willy-nilly, but from making the only realistic decision in a bad situation.

• [Takuan]

  http://www.nytimes.com/2009/05/20/your-money/20money.html?_r=1&hp

• [EH]

  If a product exploits a flaw in human nature

  What exactly is this “human nature” to which you refer? Where are you drawing the line with “detriment to society?”

  Controlling factors of the societal type you appear to be advocating depend on vagaries that cannot be codified or regulated and thus, inevitably, wind up as moralistic tyranny of the sort that (i.e.) keeps alcohol from being sold on Sundays in certain parts of the country. In other words, you don’t like something so you think other people should be stopped from doing it. That’s fine, and I think we all have social preferences along those lines, but it’s also a good way to get punched in the nose.

• [Anonymous]

  @11 – While I can also sympathize, I make a monthly contribution to a safely-invested emergency fund, which by now is quite large and has made me some interest, while being great for things like new roofs & transmissions. I am currently foregoing a lot of good-ol’ consumerism to make sure I can contribute to this fund. I feel good that the only debt I have is to a mortgage provider.

• [Inkstain]

  “What exactly is this “human nature” to which you refer?”

  Take your pick. The debt industry made the decision to shift away from sound lending practices in order to prey on the combination of several known human cognitive fallacies.

  It starts with this to induce people to live beyond their means for a short time:
  http://en.wikipedia.org/wiki/Hyperbolic_discounting

  and once they are hooked, they use these two:

  http://en.wikipedia.org/wiki/Pseudocertainty_effect
  http://en.wikipedia.org/wiki/Irrational_escalation

  to keep them on the line.

  ” Where are you drawing the line with “detriment to society?”"

  Where society chooses to draw it. That’s what democratic societies do. When we determine that something is detrimental, we regulate or outlaw it.