Not All Debt Is Created Equal: On the Mental Accounting of Debt Forms

Eesha Sharma, Dartmouth College, Stephanie Tully, University of Southern California, and Cynthia Cryder, Washington University, 2019, 19-121-06

What is the role of marketing in contributing to debt uptake and repayment? Building on mental accounting research, Eesha Sharma, Stephanie Tully, and Cynthia Cryder posit that debt forms that are virtually identical in function -  for example, loans and lines of credit - can be represented quite differently in consumers’ minds. In particular, they suggest that differences in the way that credit is marketed relative to loans influence the extent to which consumers mentally represent “credit” as money to be repaid (vs. money to be spent). These differences in mental representations are consequential, influencing willingness to incur debt and concerns about debt repayment.

They test their hypotheses using both real world data and controlled laboratory studies. They demonstrate that consumers are less likely to mentally represent credit (vs. loans) as money owed rather than money to be spent, using a visualization task, differences in Google search patterns, and consumers’ natural associations with credit cards and loans.

Further, they show that these mental representations are consequential and influence consumer interest in using debt and concern about repaying debt. Finally, they leverage the knowledge that consumers mentally represent credit cards differently than loans to design interventions that encourage consumers to think about credit cards as money to be repaid, and demonstrate that this curbs credit card uptake and usage.

Put into Practice

Their findings have several important managerial implications:

First, their results suggest systematic differences across keywords that consumers use when searching for financial products, which can be helpful for companies bidding for advertising space.

Their results also indicate why companies may have difficulty in selling financial products such as personal loans, even when they are economically advantageous for consumers. Systematic changes to the way loans are marketed may increase consumer acceptance of loans over time.

Finally, changes in marketing communications, product design, or nudges that encourage consumers to think about credit as “money owed”, can be effective in reducing potentially delinquent credit usage. For example, labeling credit card statements as “loan statements” may improve repayment. These changes can be implemented by credit card companies aiming to manage higher-risk clients, and for non-profits and policymakers focused on helping consumers manage debt.

Eesha Sharma is Associate Professor of Business Administration, Tuck School of Business, Dartmouth College. Stephanie Tully is Assistant Professor of Marketing, Marshall School of Business, University of Southern California. Cynthia Cryder is Associate Professor of Marketing, Olin Business School, Washington University.


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