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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.
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
Views: 27
Replies to This Discussion
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Permalink Reply by jacquesk on -
In an ideal world everyone would have the self control not to get in over their heads with credit card debt or debt of any kind but not everyone has that type of control or are in a life position where they can avoid it. Credit can be very seductive especially when offered with all of the bells and whistles. Sometimes self control is only learnt via some very hard life lessons (first you get the test then you get the lesson).
One of the facets I have always found interesting about addictions, and credit/spending can be a addiction, is that they can creep up on a person so gradually that few of us realise until way too late the point where we exceeded ourselves and lost control of the situation. From my observations of friends and acquaintances there is a component of addiction to buying and more and more credit just makes it easier.
I disagree with the sentiment that it isn't the banks problem. Who gets the unsolicited offers? In my experience it is people who already are in debt to the banks? Why? Because they are good little earners for the banks. The bank doesn't care if you are having problems paying your credit card debts. The longer it takes you to pay it off the better it is for the banks bottom line. It is a parasitic relationship rather than a symbiotic relationship.
As an analogy if liquor companies somehow got a list of problem drinkers and started sending them letters offering them more alcohol what would the general public make of that? More than likely we would see that action as reprehensible. (Would we say that alcoholics should have more self control?) Why should/is it any different for the banks?
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Permalink Reply by Kbot on -
Good analogy - those with money problems are very much like addicts, and have enormous trouble exerting self-control when it comes to spending.
However when it comes to a solution, it's not easy to know what to do. The banks aren't about to give up this very lucrative income stream so the only way to get them to change is to change the policy for credit cards.
I think the biggest problem with credit cards from the consumer's point of view is that they're unsecured. Because people aren't putting up an asset as security they almost view it as though it's not real money. It also means that people who don't own any assets can get credit easily (my little brother is a student living overseas and recently received a letter from a bank asking him if he wanted to increase his limit to $20,000), which is bloody dangerous. If they've never been able to save money in the past to buy assets or even just to have cash in their account (if they had this they wouldn't need a credit card) then why on earth are they going to be able to pay back their credit card debts?
Therefore I think the need to put up security would protect the consumer because it would make it all the more difficult to get a cc. Not that the banks would be too keen on this idea...
Another option would be if the banks did lend it out unsecured, then how about if it was really unsecured - i.e. the person didn't have to pay it back if they couldn't. Like DJs - no questions asked, although you'd be forgoing your chance to get another one in the future. Banks would certainly do their credit checks better, and wouldn't be shooting off credit limit increases willy nilly!
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