How to leverage mental shortcuts and cognitive biases in delinquency management

Debt collection is traditionally seen as a purely transactional process. However, this approach overlooks a significant opportunity. Once you understand how customers make decisions—especially when they’re dealing with financial stress—you can transform collections from a frustrating, intimidating experience into a positive, empowering one, all while improving key collection metrics.

Instead of relying solely on penalties and deadlines, successful debt recovery strategies leverage behavioral science to guide customers’ decision-making. Tapping into behavioral patterns helps you connect with customers in more personalized, empathetic ways and motivate them to take action to resolve their debt. This enables you to increase their awareness of repayment options they may be unfamiliar with or not consider due to the stress—or perceived shame—of their situation.  

In this post, we examine the following mental shortcuts and how to use them to influence customer repayment behavior:

  • Reciprocity principle 
  • Implementation intentions 
  • Urgency heuristic

Predicting responses to collections strategies

Normally, heuristics and cognitive biases help us navigate our daily lives with ease. But financial stress makes it harder for us to think straight—and that can lead to sub-optimal decisions. Ultimately, instead of making it easier for us to repay our debts, these mental shortcuts and biases can land us in a deeper financial hole.

In the context of delinquency, this means customers often repeat the same behaviors due to these shortcuts. In other words, we see recognizable patterns. 

Here’s the good news: If you understand somebody’s past repayment behavior, you can usually predict how they’ll respond to specific collections messages. So you can tailor your future collections messaging campaigns to each specific person—and fine-tune your emails and text messages to be highly effective.

How do you do this? By leveraging heuristics and cognitive biases in a way that empowers customers to take control of their financial situation. 

How to leverage mental shortcuts for more effective debt recovery strategies

By understanding how heuristics and cognitive biases shape decision making, you can tailor your messaging to guide customers to positive repayment behaviors. There are dozens, if not hundreds, of these mental shortcuts, and different people will be open to different mental shortcuts based on their individual experiences and circumstances. In short, understanding exactly how each one works and when a customer will be receptive to it is critical in modern debt collection.  

Let’s take a high-level look at three of the most common heuristics we can use to influence customers’ responses.

Reciprocity principle

According to the reciprocity principle, people tend to reflect the type of treatment they receive from others. If a person receives positive treatment such as a compliment, they may be more inclined to return this treatment.  

To increase collections, offer empathy and help in your communication with customers. By showing your understanding and support, you encourage them to reciprocate by taking positive action. Acknowledge the customer’s value, and make it clear that you’re on their side. This makes them more likely to feel obligated to respond positively—either by making a payment or reaching out to discuss their situation.  

Example: “Jon, you’re a valued customer, and we don’t want to say goodbye. Let’s work through this together. Call us today to discuss your options.” 

Implementation intentions

People are far more likely to follow through on their goals or intentions if they create an “if-then” plan that specifies when, where, and how they’ll complete the activity. We refer to this as “implementation intentions.” 

To use it in debt recovery, frame your message as a specific, actionable plan that outlines the steps the customer needs to take. Offer a simple checklist that breaks down the process. This reinforces how small actions can lead to significant progress toward their larger goal of being debt-free. Encouraging them to take the next step right away can reduce overwhelm and make the path forward seem more attainable. 

Example: “Frank, you may have forgotten to pay your last bill. We want to help you put a plan in place to get back on track. Take the first step by making a payment now. Next, consider signing up for a payment plan.”

Urgency heuristic

When a task is urgent, people are more likely to act on it. When you state expressly how much time there’s left before an event, it increases the sense of urgency.  

To encourage customers to repay their debts, provide them with a specific deadline that motivates them to act quickly. The closer the deadline, the more pressing the task feels, which makes them more likely to act immediately. Use time-sensitive language like “by the end of the day” or “within the next 24 hours” to enhance the sense of urgency.  

Example: “Dee, pay your balance of $287.36 within the next 24 hours to avoid suspension of service.”

Treat people like people for successful debt collection

By leveraging heuristics and cognitive biases, you can evolve debt collection from a reactive, punitive process into a proactive, personalized strategy. Each of the techniques we discussed here helps you meet customers where they are while treating them with respect. As a result, these strategies empower them to take meaningful steps toward resolving their debt while preserving a positive relationship with your business for the long term.

Why reframing customers’ financial situations is key

In debt recovery, heuristics and cognitive biases can get in the way of a customer taking repayment action. Here, we explore how to counteract mental shortcuts that prevent customers from making sound financial decisions when they’re in debt, using these as examples: 

  • Fresh start effect 
  • Mental accounting 
  • Pain of paying

Mental shortcuts like prospect theory and optimism bias can heavily influence how customers react to collections messages. It follows that when we recognize the mental shortcuts at play, we can adapt our messaging to reframe their situations in a more positive, empowering, and action-inducing light. This is critical to improving cure rates.

Data science—an essential element of effective debt recovery messaging

In this endeavor, data science is indispensable. By analyzing millions of data points—from customer behavior patterns to historical repayment data—we can uncover hidden trends and signals that allow us to predict where each customer is in their debt journey. In other words, we can determine which delinquency archetype they are.  

This context enables us to determine what types of mental shortcuts are likely impeding repayment—and when customers are most open to responding positively to specifically framed outreach campaigns. It’s a complex process involving predictive modeling, behavioral segmentation, and near real-time analysis. 

For instance, we can identify when a customer is likely influenced by the “fresh start effect” or when they’re probably compartmentalizing their finances in ways that prevent them from prioritizing debt repayment.  

By understanding these patterns, we can leverage applied behavioral science—or the study of decision-making—to craft targeted messages that counteract these biases. Ultimately, this makes it easier for customers to take the necessary steps to resolving their debts.

Examples of mental shortcuts in debt and how to counteract them

There are dozens of mental shortcuts—and many of them are helpful for navigating our daily lives. But when they get in the way of a customer’s repayment efforts, they become a problem for both the customer and collections. Let’s take a closer look at three mental shortcuts we frequently encounter in a customer’s debt journey.

Fresh start effect

People inherently have a slight positive bias towards things that are new. Think of all those New Year’s resolutions we make, like making healthier food choices or stopping smoking.  

Is there any practical reason for starting—or stopping—a specific behavior on January 1st? Nope. But for some reason, there’s an emotional significance to it that we recognize immediately. A new year is a fresh start in many people’s minds. And a fresh start is an opportunity to leave past failures behind and start anew… so we gravitate towards it.  

To counteract the fresh start effect, we have to understand that the customer is focused on their past failures and then redirect their attention to the new opportunity we present. 

Let’s say that Mary is frequently late with her phone bill payments. She keeps trying to make them on time, but recently, her service was disconnected and she had to pay a significant late fee—on top of her past-due bill—to get reconnected. So she promises herself, “This month, I’m going to pay the bill before incurring late fees.” 

In this situation, we could reframe her fresh start bias with a message that says, “Mary, let’s start the month fresh by setting up autopay for your phone bill!” This takes advantage of her inclination to choose something new (a new month) for positive action while offering her a solution that effectively ensures she pays all future bills on time.  

Mental accounting

People tend to allocate funds into specific categories. For instance, Darren and Jerome have $5,000 in their joint savings account that they’ve earmarked for a trip of a lifetime to Machu Picchu.  

They also have $3,000 racked up on their credit card.  

Technically, they could use the money in their savings account to pay off their credit card debt. But they don’t, because that money is reserved for the trip they’re both looking forward to.  

And so the interest keeps accumulating on the credit card debt... 

When we recognize mental accounting, we can send messages that make the customer aware that they would benefit from taking a more holistic approach to their finances. We break down the silos between the different “pots” they’re reserving for specific objectives to show them that by redirecting their funds now, they’ll have more money in the future for those objectives. 

An example email could be: “Darren and Jerome, imagine how much more you can save by redirecting your funds toward reducing your credit card balance today. Pay off your balance now to stop additional interest charges from piling up, and free up cash for your other priorities.”

Pain of paying

With pain of paying, a customer has negative feelings due to the initial sense of losing money when they pay the bill. But they also have additional negative emotions associated with settling the bill. Maybe it’s humiliating for them to call to make the payment, or perhaps they feel resentment because they had to scrape to get the money together.

One way to counteract the pain of paying is to highlight the benefits of making a payment. For instance, June has an overdue car payment. She keeps thinking of paying it, but she’s been working overtime to make ends meet and is having a hard time letting that money go. 

To prompt her to pay, we could send her a text message that says, “June, don’t waste your hard-earned money on late fees and interest—make a payment within the next 24 hours.”

The combined value of data science and behavioral science in debt recovery

To successfully overcome mental shortcuts in debt recovery, we need to combine the power of data science with the nuances of understanding decision-making. We can use predictive models and behavioral segmentation to help pinpoint when and how customers are most likely to respond to specific messaging. Then we can leverage our in-depth insights into mental shortcuts to guide the messaging, tone, and timing of our outreach. This integrated strategy encourages customers to take repayment action in a positive manner—and that leads to improved engagement and higher cure rates.