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Debt Collection Practices

Debt collection techniques vary per industry, including whether or not third-party debt collection companies are used.

We’ll look at common debt collecting tactics and trends using the credit card industry as a case study.

As of December 2019, credit card debt accounted for over one-fifth of all outstanding non-mortgage consumer debt (19% of outstanding non-mortgage consumer debt, or 6% of all outstanding consumer debt). In December 2017, the Consumer Financial Protection Bureau submitted a report to Congress on the consumer credit card market. Credit card lending, like other businesses, has different outcomes for borrowers with subprime credit scores and those with higher, or prime credit ratings. According to the survey, “consumers with superprime credit scores account for a prominent 81 percent portion of the amount spent using credit cards as of the fourth quarter of 2016, which is much greater than their 65 percent share of accounts.” “Consumers with prime scores account for the next greatest proportion of spend at 14%, which is lower than their 19% account share.”

The average credit card amount at the end of 2016 was $4,800, and by 2019, users owed an average of $6,194. The average credit card debt per consumer has climbed by 6% since 2009. Between 2016 and 2019, delinquency rates remained generally steady, with minor increases.

On average, credit card holders with credit scores in the center of the range had larger balances. The following were the average balances for credit score brackets in the second quarter of 2019:800-850: $3,616

  • 740-799: $6,051
  • 670-739: $9,712
  • 580-669: $6,489
  • 300-579: $3,446

The CFPB report reveals the following in terms of delinquency:

  • There was no evidence of a link between the recession and an increase in severe delinquency rates (missing three or more minimum monthly payments, or being 60 days or more overdue).
  • Since 2011, the rate of serious delinquency has decreased significantly.
  • Delinquency rates for general purpose cards have reduced more than those for private label cards, and are now between 8% and 9%.
  • In 2010, the highest delinquency rate for general purpose cards was more than 14 percent.

According to more recent statistics from TransUnion’s Industry Insights Report, the credit card delinquency rate (90+ days past due) climbed significantly between the third quarter of 2018 and the third quarter of 2019, from 1.71 percent to 1.81 percent, as reported by CreditCards.com. This is a full percentage point lower than the peak of 2.97 percent in the fourth quarter of 2009.

Despite these encouraging figures, credit card delinquency remains a major concern in the industry, and credit card issuers must use debt collection techniques to recover outstanding obligations. The CFPB study covers credit card issuers’ debt collection strategies, which include:

  • Initial collections are frequently handled by in-house collectors.
  • Some card issuers mix in-house collections specialists with first-party collectors who collect on behalf of the card issuer.
  • Certain categories of accounts, such as those designated as late-stage or high-risk, are handled by third-party collection agencies.
  • Issuers have tended to rely on in-house or first-party collections resources over third-party collections firms in the preceding two years.

Issuers utilize a variety of contact techniques to collect pre-charge-off debts, including:

  • Some issuers limit contact attempts to three per day, while others allow up to 15 per day. The lower limit was four contact attempts per day on average, according to the CFPB’s 2015 study.
  • The average number of call attempts per day for all issuers was 2.4 in 2016.
  • When contacting delinquent debtors by phone, most issuers have mechanisms in place to accommodate borrowers with low English ability.

Credit card companies provide a number of services to assist customers in repaying their debt and avoiding potential losses from late accounts:

  • Within the last two years, issuers have shifted away from short-term programs and toward enrolling consumers in long-term plans.
  • Following the recession, the inventory of balances in loss mitigation programs skyrocketed, however it has since begun to decline as people depart the programs or pay off their obligations.
  • Most issuers have regulations prohibiting them from collaborating with third-party debt settlement firms, preferring instead to enroll customers in their own loss mitigation programs.

An issuer would often charge-off an account if it is 180 days or more past due. Issuers use one of numerous tactics at this point:Continued collections via in-house resources

  • Collections are outsourced to third-party entities.
  • Accounts are sold to debt buyers.
  • Taking legal action
  • Keeping track of the account (hold the account while engaging in no further collections efforts)

According to the Consumer Financial Protection Bureau, the scale of issuers’ third-party collection networks (which include agencies and legal firms) has shrunk in the last two years, falling from 127 unique collectors across issuers in 2015 to just 105 unique collectors across issuers in 2017.

In 2016, the share of total pre-charge-off dollars among consumers with several accounts from the same issuer ranged from 10% to 67 percent. In 2016, issuers who sought litigation on charged-off accounts had an average amount of $6,700. Charge-off debt sales are also on the decline, with fewer issuers selling off charge-off debt in 2015 and 2016 than in previous years. However, many of the issuers who continue to sell debt expect to boost the sale of charged-off debt in the coming year.

In the credit card sector, as well as other lending industries, debt collection remains a critical demand. According to the National Foundation for Credit Counseling’s 2019 Financial Literacy Survey:1 in 3 households in the U.S. carry credit card debt from month to month (37%, a decrease from 39% in 2017).

  • 15% of adults in the United States carry credit card debt of $2,500 or more from month to month (15 percent , compared to 16 percent in 2017).
  • Within the last year, 14% of adults in the United States have applied for a new credit card.
  • In the last year, 6% of adults in the United States have been denied a new credit card.
  • In the last 12 months, 6% of adults in the United States have made one or more late credit card payments.
  • In the United States, 6% of adults have made a credit card payment that was less than the minimum needed payment.

While consumer spending and borrowing have been high in several sectors in recent years, lenders across the board will continue to improve their collections strategies by combining a variety of methods, technologies, and services to improve recovery. In the end, it’s a win-win situation for consumers, as paying off delinquent debt improves a consumer’s financial situation, and effective collection practices benefit borrowers in general, from lower interest rates to expanded credit access as lenders are willing to take more risks on traditionally higher-risk borrowers.

Marcadis Singer, PA
5104 South Westshore Blvd.,
Tampa, Florida.
Phone: (813) 288-1881

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