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The psychological manipulation of consumers used by banks and other credit providers to persuade people to take up offers of higher credit card limits has been slammed by a consumer group as “reckless lending”.

A landmark report commissioned by the Consumer Action Law Centre has exposed psychological tricks used to market credit card limit increases in unsolicited letters.

It was found that lenders frame the letters in ways that make it likely that customers will not think too hard about taking on more debt and just accept the limit increase.

“For example, the letters trigger the natural human instinct to trust ‘experts’– in this case experts who have already determined you can afford a limit increase,” says Dr Paul Harrison, Senior Lecturer in consumer behaviour and marketing at Deakin University, and principal researcher of this report.

The letters also infer that this is a ‘limited’ offer, and make sure that customers feel like they already “own” the limit increase, triggering psychological factors such as scarcity, loss-aversion and the endowment effect.

The letters also use positive words and especially avoid the word ‘debt’.

Warnings are in much smaller print and can’t counter-act the strength of the other messages.

Ms Nicole Rich, Director – Policy & Campaigns, Consumer Action Law Centre says that lenders should be forced to implement some psychological “breaks” in the credit card limit increase process; for example, by making customers nominate their own choice of a higher limit and provide information about their current income and debts.

“It is also time to consider if unsolicited, pre-approved credit as a marketing strategy should be banned,” says Rich.

Money Confessions would love to hear your thoughts about these letters that offer an increase on credit limits.

Tags: Debt, consumer, credit, manipulation

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Replies to This Discussion

Permalink Reply by AK47 on September 24, 2008 at 5:39pm

The simplest solution is to ignore these letters. Request for a credit limit increase only when YOU need it.

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Permalink Reply by patric p on September 24, 2008 at 9:51pm

What is wrong with a credit limit, in my view it's just wind, apply,if you get it, good, the DON"T USE IT.
I have applied for credit cards and have been turned down because I don't meet the criterior, I have also applied and received one with a free gift and never used them, Followed by nasty letters because I did just that. Who cares!!!!!!!

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Permalink Reply by Beng on September 25, 2008 at 10:26am

I think it boils down to many things being the lowest common denominator- the average financially uneducated person doesn't realise how much credit card debt will cost them so that $500 or $1000 increase in credit limit doesn't seem like much. Personally I don't think banning financial products is the solution- to me proper education of people in personal finance in school would teach those that actually want to learn something useful rather than learn something that they will never use again.
Simple lessons in compounded interest- that $20 interest you don't pay off each month at 18% p.a credit card interest rates adds to a heck of a lot after 5 years.
Think it works out to be about $750 interest and $1200 principal that is accumulated- so that $20 a month grows to a debt of nearly $2000 after 5 years.

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Permalink Reply by MoneyMagnet on September 25, 2008 at 12:34pm

As a finance broker, I think that unsolicited credit should be banned. I come across people all the time who have overextended themselves due to interest free period contracts and the credit cards that go along with that.
I leased a computer a couple of years ago, and even though I said I didnt want the $10000 credit card, it was still sent to me. When I sent it back, they said it was part of the conditions of the lease. Well, I paid out the lease that day.
I think that it is a huge problem with young people who are tempted to not only have the large house but all the brand new furniture and big screen tvs to go in it. When the bank assesses them for a home loan, it generally is ok, but then the extra credit cards come along and then they struggle with repayments, then the wolves come barking at the door. There should be more checks made on credit card applications.
As a community service, I do go into high schools and explain about credit, compound interest and the credit reporting in Australia. Most people are unaware that the phone bill that they didnt pay 3 years ago will affect them when they try to get a home loan. Unfortunately we are conditioned to be the ultimate consumers by the multinationals, that we live in a throw away society because thats how the big companies want us to be. It is when you hit lifes hurdles that you realise that its not about things, its the connections and people in your life that really count. Just ask the dying person if it mattered what size tv they had to watch.

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Permalink Reply by Nicole on September 25, 2008 at 7:36pm

Hi everyone, thanks for your interest in our report. As a bit of background, we commissioned the report because we were getting lots of request for help from people in too much debt who had accepted unsolicited offers for more credit. Of course individuals have to bear some responsibility for their own actions and financial decisions, but that didn’t really explain what was going on and we wanted to understand more about how these letters work.

What we found is that these letters are marketing tools – they are specifically designed to make it more likely you will accept their offer of more credit/debt, playing on known cognitive biases that human beings are subject to. We agree there is an important role generally for financial education and financial literacy initiatives in the community, but they do not necessarily get at the problem we uncovered here. The whole point of these letters is to undermine people’s informed and rational decision-making, whether they are financially educated or not. That’s why the report writers concluded that just providing more information or warnings to consumers is not the answer: ‘At best, we can assume that the financial providers are misguided in their use of the warnings; at worst, the assumption would have to be that they are being disingenuous to their customers, and, more importantly to legislators.’ Most people will throw these letters in the bin, but some people won’t and this is why the banks and other lenders use them – to cast as wide a net as possible for their products.

Nicole Rich, Consumer Action Law Centre

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Permalink Reply by Matthew Reader on February 8, 2009 at 2:53pm

Hi Nicole, I think that you're up against it in trying to help people to not fall victim to these campaigns by banks. People are greedy, and they find many different ways to justify not only their acceptance of the offer for a higher credit limit (good for a rainy day, it's good to have, etc.) but also their subsequent use of the credit card to buy stuff they don't need.

And banks simply play on this greed, much like fast food companies play on greed of a different sort.

This greed is in the process of unravelling, and personally I think this is the only way to fix matters. As more and more people are unable to pay back their debts and banks' bad debt starts to skyrocket - thereby sending their shareholders into a panic and the stock price on a downward spiral - banks may be forced to rethink their lending policy. And we may be forced to think before we accept that higher credit limit. Unfortunately it's going to take a lot of people getting burnt for this situation to improve, and I think that's going to take place over the next few years...

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Permalink Reply by Marie on February 5, 2009 at 12:41am

I was sent a letter like that . The bad news is - I accepted. I've been really struggling to pay it back, however, recently I've been able to pay more regular payments with a higher repayment.
I have available credit with them now but I'm not going to touch it! I'll pay it off as fast as I can.

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Permalink Reply by jacquesk on February 5, 2009 at 12:59pm

Hi Folks
I found that back when I was a struggling student and used to max out my card regularly (on foolish things like food and rent) I used to get regular letters from the bank offering a credit increase. I didn't take them up on it. Now that I balance my card every fortnight I do not get them. I am in complete agreement with MoneyMagnet that unsolicited credit offers should be banned. I have a number of friends who have been caught out with this trap. Some could not resist temptation, some were caught out by changes in life/employment etc.

If you are, like Marie, struggling with this my advice is to consider consolidating your bankcard debt into a loan that charges lower interest then either taking the scissors to your card or getting your credit limit reduced. This has worked for friends of mine including one who had multiple cards all of which were maxed out. The lower interest rate means you can pay it off quicker and cheaper and you have removed/reduced the source of temptation.

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Permalink Reply by JeffK on February 5, 2009 at 10:29pm

Jacquesk is right - the key is to remove (or limit) the source of temptation - i.e. cut up your credit card or reduce the limit.

Marie, you say that you're not going to touch it, then you should give the bank a call and get them to reduce it. If it's there, you will be tempted to use it and this could land you in hot water later on. oOu'll end up with a bunch of stuff you don't need and the stress of paying your cards off.

Kill the cards.

JFK

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Permalink Reply by cap59 on February 8, 2009 at 4:29pm

The problem is not the banks. We expect that when we want the money or credit limit that we should be able to get it. The problem is that people the world over don't accept that they are responsible for there plight. I am not a financial expert but I know that when you spend, you better make sure you can pay it back. It is the consumer who is to blame not the lenders.

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Permalink Reply by Miffy on February 8, 2009 at 8:23pm

I'm with you cap59, the problem is with the consumers who think that they can get this "free" money, forgetting that it must be paid back at some point. People are greedy, and banks play on this greed. They can't be blamed for that when every other industry does the same thing via marketing. Isn't marketing all about convincing someone to buy something they don't need? Well, banks are a business like any other, and their goal is to make as much profit as possible. They are not a public service (any more).

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Permalink Reply by Jim on February 8, 2009 at 9:51pm

I fairly often receive letters offering me an increase in my credit card limit.During my working life I was paid my salary monthly,straight into our bank account.My wife was paid weekly ,also into our bank account.A different bank to the one we have the card with.We used a credit card for most of our purchases and always paid on time = no interest. I have been retired for a couple of years now and still receive the letters asking if I would like to up my limit.I guess the aim is to have us spending beyond our limit so the bank can partake of the enormous interest rates that they charge for the privilege of being in their debt.
As has already been stated ,we have a choice in whether we use it or not of course.But then the same choices are there to be made every day concerning smoking,alcohol,hooning,drugs,bashings etc,etc.There is a lot of evidence to show that there are some who are not very good when it comes to making wise choices.So maybe there has to be legislation to stop ourselves from going broke because of unwise financial choices just as we have with smoking,speeding,drug taking,crimes of all descriptions.
I really do not think that we can legislate common sense, how much more has to happen before we realise that we have responsibilities for our own lives and if we stuff up then we just may be at fault???
Having said that of course the powers that be see the need to stop advertising things deemed harmful to us so maybe the way the financial institutions of the land approach us and cajoule us and even stretch the outcomes to ensnare us in the debtors market,there will have to be some enforcefull guidelines for banks etc to go by when offering their customers a loan.