A concept known as Behavioral-Economics combines psychology and economics to better understand how people make decisions. By using these insights, debt collection agencies can improve recovery rates in ways that are more effective and empathetic.
Here’s how you can apply these principles to make debt collection work better:
1. Make Payment Plans the Default Option
- Default Payment Plans: Imagine you owe money on a loan. Instead of asking how you want to pay it back, the collection agency automatically signs you up for a 12-month plan. You can opt-out, but because it’s already set up, you’re more likely to stick with it.
- Automatic Payments: A credit card company could set up a system where payments are automatically taken from your bank account unless you choose to stop it. This reduces the chances of you missing a payment.
2. Frame Information in a Positive Way
- Positive Framing: Instead of saying, “You still owe $500,” a company might say, “You’ve already paid off $500! Only $500 left to go.” Focusing on what you’ve already achieved makes paying the rest feel easier.
- Break Down Payments: If you owe $600, breaking it down into $100 monthly payments can make the debt feel less overwhelming and easier to manage.
3. Show What Others Are Doing
- Highlight Success Stories: A collection agency might tell you, “Thousands of people just like you have successfully paid off their debts with our plans. You’re close to being debt-free!”
- Peer Comparisons: They could also say, “Most people in your situation have already made their first payment. Would you like to do the same today?” This makes you feel like paying off your debt is the normal thing to do.
4. Help People Manage Their Money
- Segregate Payments: Suggest that people set aside money from their tax refund or bonus specifically to pay off debt. This makes it easier to think of that money as already “spent” on debt.
- Goal Setting: Encourage setting small, specific goals like, “Pay off $500 in the next three months.” Reaching these goals feels good and motivates you to keep going.
5. Offer Small Rewards for Paying Early
- Incentives for Early Payment: If you pay off a store credit card balance early, you might get a 5% discount. This reward can make paying sooner more appealing.
- Gamification: A mobile app could turn debt repayment into a game where you earn badges or small rewards for making regular payments.
6. Make Paying Easy
- Flexible Payment Options: Companies could offer multiple ways to pay, like using a credit card, PayPal, or bank transfer. The easier it is to pay, the more likely you are to do it.
- Payment Reminders: A simple reminder like, “Your $75 payment is due in 3 days—stay on track to becoming debt-free!” helps you remember to pay without making it feel like a big deal.
7. Create a Sense of Commitment
- Commitment Contracts: You might be asked to sign a simple agreement that says, “I agree to pay $100 per month until my debt is cleared.” Signing this makes you feel more committed to following through.
- Public Commitments: If you tell a friend or family member that you’re planning to pay off $1,000 in the next three months, you’re more likely to stick to that plan because you don’t want to go back on your word.
8. Create a Sense of Urgency
- Limited-Time Offers: A car loan company might offer, “Pay off your balance within the next 10 days and get a 10% discount.” This limited-time deal encourages you to act quickly.
- Scarcity of Resources: A collection agency could say, “We have a limited number of slots for negotiating a reduced payment plan. Contact us soon to secure your spot!” This makes you feel like you need to act now.
9. Encourage People to Take Ownership
- Highlight Ownership: A mortgage company might remind you, “You’ve already invested so much in your home—keep up with your payments to protect your investment.” This makes you feel like you’re protecting something valuable that you already own.
- Ownership of Progress: A collection agency might say, “You’ve already reduced your debt by $2,000. Keep going to eliminate it completely!” Highlighting progress can motivate you to finish what you’ve started.
10. Keep Communication Simple and Consistent
- Simplify Information: A medical billing service could send a statement that clearly says, “Your total due is $300. Pay this off in three $100 payments over the next three months.” Simple and clear communication makes it easier to understand and act on.
- Consistent Messaging: If a utility company sends regular reminders like, “Avoid late fees—set up auto-pay today!” you’re more likely to remember and take action because the message is clear and repeated.
11. Prioritize Transparency and Fairness
- Clear Fee Disclosure: Instead of burying fees in fine print, a lender could state upfront, “This loan has a $25 origination fee, but no hidden charges.”
- Transparent Communication: A debt collector might say, “We understand times are tough. Let’s discuss a payment plan that works for you, with no surprises.”
12. Utilize Data-Driven Personalization
- Tailored Plans: Based on past behavior, a lender might offer one person a longer repayment term, while another might get a lower interest rate for early payoff.
- Communication Preferences: Some people respond better to emails, others to text messages. Analyzing this data lets collectors reach people in the way they prefer.
These strategies help debtors manage their payments more easily and encourage them to stay on track, which benefits both the debtor and the creditor.