Which Motivates You? Financial Incentives or Financial Penalties?

February 16, 2007

Thanks goodness for late fees! No, I don’t really feel this way but Golbguru has an interesting article arguing that late fees are necessary to keep us “inherently lazy” people on track systems moving efficiently.

He makes a good point. I hate having to pay out extra money in late fees. I’ll even call up a company and try and get out of them. However, I need to remember when I “earn” a late fee it’s really myself I should be getting pissed at, not the company. As Stephen Covey says, responsibility is the ability to choose our response to a situation. We can get mad at the company and be late again next time. Or just shrug it off and be more timely with the next payment. In the future I’ll try not to get so worked up over late fees but I’m still going to call and try and get out of them.

Punishment vs. Reward
He also argues the reason that late fees are so prevalent is hat punishments are more effective than rewards in most cases. This got me thinking, I wonder how it would work out if companies offered an incentive to return items or pay bills early. For example, if I paid my credit card balance a week early American Express could give me some sort of reward. The financial penalties from the late fees of others could go to fund the incentives.

It would be an interesting experiment, I wonder if people would change their behavior to take advantage of the incentives or if they would stick to their old ways of either late or timely payment.


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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6 Responses to Which Motivates You? Financial Incentives or Financial Penalties?

  • Monique Attinger

    Late fees do keep me paying on time. If there weren’t late fees, I’m a notorious procrastinator and my bills would likely wait months for payment. However, I’d LOVE to see someone offer me an incentive to pay early! I’d be just as motivated and I’d see some rewards for “playing nice”. However, I have to agree with Michael: I’m not holding my breath to see incentives any time soon.

  • Michael Chantrel

    I hate to say it: I think that companies make too much money from late fees to ever consider an “incentive” program to pay early! The cost-benefit of the incentive program would never match the amount of cash they rake in by penalizing. I suspect it’s only organizations that don’t want to have or build an extensive debt-oriented department (like a municipality such as Brisbane) that would go this way, in my opinion. Any company that already invests a lot of money in recovering debt is more likely to make use of this existing workforce by focusing on penalizing over incenting.

  • Martin Lindsey

    Interesting concept. Here’s a way to (A) Avoid fees from a tradional bank and simply be more disciplined or (B) Take advantage of the early payment rewards mentioned by Himanshu. Just sign up for your bank’s online banking web site and keep up with your balances each day. Read the article I wrote today in my blog http://martyblogs.blogspot.com/ and set it up today so you can avoid the pain of one system or enjoy the rewards of the other.

    When you get there, how about favoriting me with the technorati button on the left? Thanks.

  • Himanshu

    Well, nice thought. But you don’t have to guess anymore. I am in Brisbane, and my local council does offer a discount if I pay the council rates on or before the due date.

    And guess what, just like avoiding late fees, I try to take full advantage of it, and get pissed off if I miss the deadline by any chance.

  • Golbguru

    Please forgive the grammar in the earlier comment, my brain is working slower than my hands.

  • Golbguru

    Money smart life: First, thanks for the mention. I am glad you picked up on this. 🙂

    Your thoughts about getting incentives for early payments is very *noble* (I am not being sarcastic here), and our corporations are just the antithesis of that. I am pretty sure such a system would reduce at least some percentage of late payments (for the few among us who are motivated by rewards more than punishments), but it will also mean financial loss to the Capitalism Inc…so they are going to try hard to fight such a system. But like you said…it will be very interesting to see what happens if this really gets implemented.

    Btw, I don’t *love* late fees…but sometimes it feels better to be a devil’s advocate and counter-argue..refines the subject under discussion. 🙂