| Debt Collection |
For credit card companies, non-performing debts are part of the cost of doing business. Even in strong economies, about 3 to 5 percent of the money borrowed on credit cards will eventually become delinquent debt. That's one reason credit card issuers generally charge high interest rates -- to compensate for that risk.
Not surprisingly then, the rapid growth in consumer credit over the past decade has resulted in a huge jump in the amount of outstanding bad debts. And this trend has accelerated in recent years as credit card companies have increasingly offered cards to lower quality borrowers. While these borrowers can be charged higher interest rates, they're also far more likely to default on their payments.
A
brief glance at our chart, which compares consumer credit to personal income,
illustrates the scope of the recent debt explosion. In 1990, the average
household carried installment debt (car loans, credit cards and personal loans)
of about 14% of annual household income. That number is now closer to 25% of
income, which translated to nearly $9,000 in credit card debt for the average
American household in 2004, up from about $2,500 in 1990.
Again, this increase in consumer debt has also led to increased defaults. While non-performing debts may well be a nuisance for the credit card companies, they're music to the ears of the debt collection business. Debt collection companies purchase bad debts from card issuers for as little as 2 to 5 cents per dollar of debt owed. The companies then turn around and try to collect as much of this debt as possible. In many cases they are able to collect as much as 2 or 3 times the purchase price (sometimes 10 cents per dollar or more), making this a very lucrative business.
| Major Players in the Industry |
| Asset Acceptance Capital (AACC) |
| Asta Funding (ASFI) |
| Encore Capital (ECPG) |
| Portfolio Recovery Assoc. (PRAA) |
With delinquent debts on the rise, the credit card companies have been selling off enormous portfolios of bad debt to these debt collectors. In 2005, debts sold off by the credit card companies totaled $66 billion, about 90X the amount of debt sold off in 1993.
And debt collectors are getting better at collecting on the debts they purchase. In many cases, agencies simply contact debtors and arrange a repayment schedule or agree to a settlement that reduces the burden of the outstanding debt. However, increasingly agencies have decided to take a page from ancient Roman debt collectors by using the court system to help collect from borrowers. As a result, these companies employ a small army of lawyers to pursue such cases.
In addition, stricter bankruptcy laws enacted in 2003 now make it much more difficult for consumers to avoid court settlement of their outstanding debts by declaring personal bankruptcy. That has helped these agencies collect more out of every dollar in debt they purchase.
