When we set out to collect money from late payers, our treatment strategies make a number of implicit assumptions. One of these most basic assumptions is that users have a decent understanding that a delinquency is a bad thing– that it leads to problems today and down the road.

I’ve had a long-standing intuition that the most at-risk consumers know the least about the effects of delinquencies on their financial lives. This is troublesome. When consumers don’t understand the impact of a delinquency, they have less incentive to act, increasing the odds they’ll hurt themselves and their relationship with you.

Recently, we had the opportunity to test this assumption, and ask consumers: how well do you understand the impact of late payments on your credit score?

In a representative sample of the US population, 85% of consumers say they understand the impacts of a delinquency well, while only 15% of consumers describe themselves as wanting to “learn more.” We used our COVID-19 Financial Health Check to gather these responses. Through that tool, we also ask consumers to tell us how they feel about their financial situation, rating their mood from very anxious to very confident. I was curious to know how consumers experiencing different levels of anxiety describe their understanding of delinquencies.

I found something surprising. The most anxious consumers appear to be the most confident about their knowledge and are less likely to want to “learn more” about how delinquencies work– even less likely than those that report comparatively low levels of anxiety. What is happening here?

Overconfidence

One way to understand these results, I suppose, is to take them at face value: the most anxious or vulnerable consumers somehow understand the world of credit scoring the best. This still did not make sense to me, and I suspected that something else is at work.

In trying to understand why vulnerable consumers would feel so confident about their financial-know how, psychology provides us with a helpful construct known as the Dunning Kruger Effect.  It describes a funny phenomenon: that when we know little about a subject, it’s hard for us to size up how much more there is to learn. “When people don’t get it,” Dunning said in a recent interview, “They don’t realize they don’t get it.”

Our data seems to tell us: consumers in the most stressful situations may know the least about how collections affect them, but will think they know the most. This view is supported by new research in financial literacy. A 2019 study showed that those who are overconfident about their financial know-how were three times as likely to fall into delinquency with their home mortgages. Counterintuitively, reporting that you know a lot about personal finances may in fact be a signal that you are a high risk.

What does this mean for collections teams?

There is a very practical take-away here. The most risky collections consumers in your team’s workflow underestimate the impact of their delinquencies. What if you had a good way to explain to them exactly what’s at stake?

The challenge is that by the time someone is in collections, financial literacy content isn’t exactly helpful. This is something that many organizations get wrong. You can’t simply offer educational content to a consumer and expect that it is going to compel them to pay. In fact, when done incorrectly, one could imagine how pushing educational content could stress out a late payer even more.

This is where our software BackOnTrack (BOT) comes in. BOT is a unique consumer experience creditors use to treat consumers in the early stages of delinquency. BOT is not educational content. Its main purpose is not education, though education is a good secondary outcome of using it.

At its core, BOT is a behavioral treatment. To user, the experience feels much like talking to a trusted friend about their situation, and hearing accurate and empathetic about that encourages them to take action.

While we do review the impact of missing payments, the goal is not to educate. Instead, the goal is to help consumers shift the way they think about their delinquency. It’s one thing for a consumer to understand what collections items do to credit scores. It’s a different thing for consumers to internalize that and want to act on this knowledge.

The difference between education and behavioral treatment is subtle, but it bears huge implications for our industry. We need only look at the sea change occurring in the weight loss space. Players like Noom and Weight Watchers have introduced applications that focus much less on education and more on facilitating gradual cognitive shifts for consumers. It has become the new standard in the industry.

BackOnTrack is doing the same for late payers. Our tool is easy to implement and helps creditors shift the way their consumers think about making payments on time.

We can help you bring this approach to collections—when you’re ready, we’d love to talk!