Credit Card Debt * Bank Debt Collection Methods * Consumer Debt * Rising Credit Card Delinquencies * Debt * Credit Cards

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Banks Intensify Credit Card Debt Collection Efforts

Last Updated: March 11, 2011

With the credit crunch in full swing, it's not just consumers who are falling are hard times. With consumers defaulting on both credit card and mortgage debt, the only way for banks to scrape up more cash is debt collection.

Credit Card Debt Statictics

The numbers do indicate consumer debt is rising. The Federal Reserve reported recently that revolving debt (primarily reflecting the balances on credit cards) rose in July 2008 at a seasonally adjusted annual rate of 4.8 percent to $969.9 billion, but fell in May 2010 to $830.8 billion. Why the big drop in revolving debt? Is it because consumers are paying their debt down?

It could be that credit card defaults are sharply on the rise. An index of new defaults, the Standard & Poor’s/Experian Consumer Credit Default Indices, showed this week that in the three months through April the default rate on credit card loans had climbed to 9.14 percent, the highest since the index began to be calculated in 2004.

In 2009 (Source: Reuters)

• Bank of America said its charge off-rate rose to 14.54 percent in August from 13.81 percent in July.
• Citigroup, the largest issuer of MasterCard-branded credit cards, said its charge-off rate rose to 12.14 percent in August from 10.03 percent in July.
• The charge-off rates for both Citi and Bank of America, two of the biggest recipients of U.S. government bailouts, were the highest yet during the financial crisis.
• JPMorgan Chase & Co, the largest issuer of Visa-branded credit cards, said its charge-off rate rose to 8.73 percent from 7.92 percent, while smaller Discover Financial Services said its rate rose to 9.16 percent from 8.43 percent.
• American Express Co's default rate fell to 8.5 percent from 8.9 percent as the company increased its lending portfolio.
• JPMorgan, Discover and Capital One Financial Corp reported late payments on credit cards -- an indicator of future defaults -- rose in August after several monthly declines.

As late as May 2010, the New York Times reported that credit card default rates are on the decline.

How Are Banks Responding to Credit Card Debt?

Financial institutions are responding by working past-due accounts more aggressively. They are putting their best collectors on their toughest-to-collect accounts (those that are at least 60 or 90 days past due), hiring outsourcing firms to supplement their internal efforts, and putting new hires on accounts that are in the early stages of delinquencies. According to a recent article in the Wall Street Journal by Jane J. Kim, "The moves come at a time when rising unemployment and a credit crunch are forcing more consumers to default on their credit card payments." The article indicates that credit card delinquencies rose to 4.51 percent in the first quarter of 2008 from 4.41 percent in the year-earlier quarter, according to the American Bankers Association. Delinquency rates appear to continue their rise in the second-quarter earnings reports, thus expectations are that the problems will get worse before they get better.

Rising Tide of Deliquent Credit Card Accounts

The rise in delinquencies is creating concern in the banking world and one result of this appears to be the development of a more proactive system to deal with potential delinquent customers. On the positive side, some companies are encouraging earlier communication when consumers know they are facing financial trouble, and many banks are providing specific communication methods such as websites and designated departments and programs to deal proactively with these customers. According to the WSJ article, Bank of America indicates that its employees have been working up cash-flow plans with delinquent customers to help them with budgets and predict how certain events -- such as a resetting adjustable-rate mortgage -- will affect their finances. Discover Financial Services has plans to dedicate a portion of their website to customers who require payment assistance, and has increased its staff dedicated to responding to emails from borrowers looking for help.

Another interesting tactic financial institutions are using is attempting to communicate with customers who are delinquent on accounts is using incentives such as gift or phone cards. The idea is to require the targeted customer to call back in order to "activate" the card, hence opening the line of communication and collection efforts. The article is unclear on how successful this practice has proven thus far, but sounds pretty sneaky to me!

Consumers who suddenly modify their payment and spending patterns may be targeted just for the change, even without any late pays. These changes are being viewed as "red flags", such as a borrower who has a history of paying bills early or normally pays more than the minimum amounts due, are now likely to catch the bank's attention if they suddenly start paying their bills exactly on the due dates and make only the minimum payments.

Bank Revisions in Debt Collection

There seems to be a myriad of new and revised methods that the banks have devised to ensure their debt is repaid in a timely fashion. The Table below provides a good summary of the methods that seven of the major financial institutions are utililizing of late.

Conclusion

In summary, it seems as though the banks will be "calling the dogs out" earlier if they sense potential trouble with the payment schedule on a consumer's account. Late paying customers can expect communication from the bank as early as with one missed payment, and you can forget all those nice balance transfer and zero interest offers once you slip into the late club. On the flip side, banks are becoming proactive at working with customers earlier in the process to develop a payment plan that is reasonable for both parties. But if you join the ranks of excessive delinquency, over 60 days, get ready to deal with a big dog collector with snarling teeth!

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