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How Credit Card Delinquencies Affect Your Bottom Line


credit-card-delinquency-affect-bottom-line-700It's a sad fact that good news is rarely 100% positive; usually we can expect some undesirable result from sunny situations. The U.S. economy's recovery after the Great Recession is a perfect example. While we're pleased about low unemployment and consumer spending in support of employment and economic growth, the lending industry is beginning to see a negative byproduct of that improved economy: rising credit card delinquency.

As consumers' confidence in their earning power and ability to pay bills has improved, they've become willing to buy, spend, and charge more. Unfortunately, not all U.S. consumers can back up their confidence with the actual ability to pay.

Consumers happy about the prosperous economy see no reason to say "no" to new debt, and they may be biting off more than they can chew, especially as interest rates rise. According to TransUnion, the lending industry must watch their accounts, as signs point to increased credit card delinquencies. Leading indicators suggesting this concern may be warranted are as follows:

  • The number of credit card accounts that are 90 days delinquent has increased steadily every year since 2014.

  • According to the New York Post, the May 2018 increase in revolving debt was the biggest increase since 1995.

  • Average amounts owed on credit cards increased $650 per household since last year.

  • Household debt levels are "hovering near record highs," according to Reuters.

  • As interest rates rise, charged purchases and payments that originally appeared manageable can become difficult for debtors to pay, especially as late fees and penalties are added.

For lenders, an increase in credit card delinquencies is an expensive proposition, since, as we know, the more delinquent an account becomes, the smaller the chance you'll be repaid at all. Statistically speaking, financial institutions will see repayment from only 20% of accounts that have been delinquent for more than 180 days, according to The Credit Research Foundation. Your state decides on the amount of time your financial institution may use to pursue collection of a debt before you must stop reporting it as an asset and write it off as a loss, often giving up hope of collecting anything at all.

Financial institutions unsuccessful at collecting on an overdue credit card bill have a few options:

  • Employ an outsourced collections vendor for assistance

  • Sell the debt to a debt collector

  • Pursue a legal judgment in court

  • Report the unpaid bill to credit bureaus to warn others of the debtor's history

Unfortunately, the unpaid debt is not the only cost the lender will incur. Here are some other expected costs:

  • Reduced (possibly zero) reimbursement for losses

  • Lost interest and fee income

  • Lost future deposit, investment, and loan relationships from debtors in default

  • Vendor costs for collections

  • Attorney and court fees

  • Background check fees as the institution works to avoid risky debtors in the future

While some amount of default is expected, a financial institution can implement risk mitigation strategies, such as a payment protection program that protects a financial institution and customers from credit card default. Highly customizable to the needs of the lender and its borrowers, a payment protection program offers benefits to both parties.

  • Disability coverage helps pay a loan if the borrower or co-borrower is unable to work due to injury or illness.

  • Credit involuntary unemployment insurance covers a specific number of loan payments if the borrower or co-borrower experiences an involuntary job loss.

  • Death benefits may pay off the outstanding loan balance upon the death of the borrower or co-borrower.

Related reading: Payment Protection: An Invaluable Program

Payment protection programs provide security to borrowers and their families, delivering assistance in paying debts at the most worrisome times. They also help the financial institution build relationships, manage risk, and generate non-interest income.

Clearly, the lending industry will never achieve zero delinquencies. With credit card delinquencies beginning to rise, it's important to implement programs that will minimize losses and protect against risk whenever possible

the recipe for risk management ebook

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