CallMiner Product Innovation Series: December 2022
CallMiner's VP of Product Innovation, Bruce McMahon, shares highlights from the 2022.12 release in his latest product innovation blog.
The Team at CallMiner
March 16, 2018
The debt collection industry has earned its share of ire over the years, but it’s an industry that continues to grow across multiple verticals including auto finance, healthcare, mortgage lending, and many others. As more than one in four Americans (28 percent) have at least one debt in collections, the need for debt collection services, whether in-house or third-party services, is clear.
We decided to take a deep-dive into the latest debt collection industry figures and statistics to get a glimpse of the current state of debt collection in 2020. We’ve compiled these findings and research into this comprehensive guide to provide an overview of the state of the debt collection industry as we head through 2020 and beyond.
In this guide, we’ll discuss:
In 2018, total revenue for the debt collection industry was $11.5 billion, a decrease from $13.5 billion in 2013. Consumer debt grew to almost $14 trillion in 2019, an increase of nearly $2.3 trillion since the peak of the Great Recession in 2009. In 2010, U.S. businesses placed $150 billion in debt with collection agencies, and agencies were able to collect just $40 billion of that total. On delinquent debt, the industry averages a 20% collection rate, a decrease from 30% a few decades ago.
According to the Bureau of Labor Statistics Occupational Outlook Handbook, there are about 258,000 jobs for bill and account collectors as of 2018. However, the industry is expected to experience a decline of about 8% between 2018 and 2028, with a loss of about 19,400 jobs. The reason for this decline, however, isn’t due to a decreased need for collections activity, but due to the automation of collections work.
A December 2017 Market Research Report from IBIS World reports that a high rate of credit defaults in 2012 resulted in an increase in demand for debt collection agencies, yet industry revenue declined slightly in 2013, despite rising aggregate household debt during the same period. The levels of debt in most major categories, per the Federal Reserve, have been rising steadily since the fourth quarter of 2015. The fourth quarter of 2019 marked the twenty-second consecutive quarterly increase in total household debt, reaching $14.15 trillion, $1.5 trillion more than the pre-recession peak of $12.68 trillion in the third quarter of 2008.
Screenshot via NewYorkFed.org
According to a report from the New York Fed, aggregate delinquency rates worsened in the third quarter of 2019, with 4.8% of outstanding debt in any stage of delinquency as of September 30, 2019. By the fourth quarter of 2019, 4.7% of outstanding debt was in some stage of delinquency. At that time, $444 billion in delinquent debt (out of the total $669 billion in delinquent debt) was classified as “seriously delinquent,” defined as 90 or more days late or “severely derogatory,” which can include debts that were previously charged off but on which lenders continue to attempt to collect. While growth in total household debt and in delinquency results in an increase in potential revenue sources, the debt collection industry must cope with upcoming regulatory changes by the Consumer Financial Protection Bureau, including proposed updates to the Fair Debt Collection Practices Act (FDCPA).
The debt collection industry makes more than one billion consumer contacts annually (as of 2013), and more than 30 million debts are in collections annually. ACA International states that, “Data from the Federal Reserve Bank of New York indicates only about 14% of consumers had debt in collections in 2015. Furthermore, prior research has found that between 90 and 95% of all outstanding consumer debt is paid on time and in compliance with the consumers’ contractual obligations (DBA International, 2014; Zywicki, 2015).”
There was about $4.225 trillion in total outstanding consumer credit as of February 2020. In the U.S., participation in the major consumer credit markets is approximately:
Graphic via NewYorkFed.org
According to data from the Federal Reserve Bank of New York, the percentage of the total debt balance in default or delinquent by 90 days or more as of Q4 2019, by loan type, includes (approximate):
According to Experian, “The average delinquency rate—the percentage of accounts 30 to 59 days past due (DPD)—across all debt categories declined by 38% in the past decade. Payments 60 to 89 DPD saw the largest decrease, falling by 55%, and severely delinquent accounts—those 90 to 180 DPD—saw the second-greatest decline of 44% since 2009. Screenshot via Experian
While most industries enlist third-party debt collection agencies to collect delinquent debt to some extent, some industries rely more heavily on third-party services than others.
According to 2013 data from ACA International, the portion of debt collection activities industries outsource to third-party debt collection agencies is as follows:
Total debt returned to creditors in 2013 by third-party collection agencies was $55.2 billion, with a net return of $44.9 billion. The Federal Reserve Bank of New York reports that as of 2015, nearly 14% of consumers in the U.S. had at least one account in third-party collection. “The likelihood of having an account in collection varies considerably across the credit score spectrum, with borrowers in the lower end of the credit score spectrum averaging 4 accounts in collection, and borrowers with credit scores above 700 averaging fewer than 1 account in collection,” according to the report.
Debt collections, both as a whole and in terms of third-party debt collection services, play an important role in the availability of credit to consumers, who rely on credit for a variety of purchases from homes to vehicles, household appliances, and in the case of credit cards, sometimes everyday living expenses. When an effective debt collection process is in place, lenders are more likely to extend credit to borrowers considered riskier (such as those with lower credit scores). Thanks to effective debt collection, the possibility of expected recoveries after a borrower defaults compensates to some degree for the borrower’s greater likelihood of defaulting.
As such, debt collection, despite the ire it draws from some consumers, is actually beneficial to consumers as it expands the availability of consumer credit to those who would be otherwise unable to access it. Likewise, consumers benefit from debt collection when a rise in post-default debt recoveries leads borrowers to offer lower interest rates.
Additionally, debt collection can play a role in consumer awareness, although this is complicated by an increase in regulatory guidelines that often make the practice of debt collection more difficult. Between 2000 and 2012, 29 changes in state regulations in 21 states occurred, and 22 of those changes were expected to make the process of collecting on delinquent debt more challenging.
As mentioned, about 30 million people in the United States have at least one debt in collections, and nearly one in five (19.5%) credit reports contain one or more medical collections tradelines. Nearly one in four (24.5%) contain one or more non-medical collections tradelines. But how much money do consumers typically owe in various industries? The statistics surrounding the prevalence of unpaid bills and amounts owed are startling:
Often, unforeseen changes in financial circumstances, such as the unexpected loss of a job, can suddenly leave families unable to pay those monthly bills, resulting in a default. If the consumer doesn’t become current with a defaulted account or loan within a reasonable period of time, the account is often sent to collections. In the case of credit card debt, credit card companies often have their own in-house collections operations, and collections activities begin immediately following a missed payment.
Credit card debt isn’t the only debt that results in collections activity. Student loans are another commonly defaulted loan, and with college graduates today graduating with an average of $29,900 in student loan debt, it’s easy to see why.
The Federal Reserve Board releases periodic data on consumer debt in the U.S. According to the most recent data (January 2020), the major holders of outstanding consumer credit include:
Revolving credit comprises $1093.2 billion of the total outstanding consumer credit as of December 2019, while non-revolving credit comprises $3097.5 billion of the total. As of December 2019, according to the Federal Reserve Board’s data, $1,643.2 billion of total outstanding consumer credit consists of student loans, while $1,196.1 billion is comprised of motor vehicle loans.
The Federal Reserve Bank of New York also compiles data surrounding consumer debt. The Federal Reserve Bank of New York’s Center for Microeconomic Data released a Household Debt and Credit Report for the fourth quarter of 2019, finding that household debt has reached a new peak driven primarily by gains in mortgage, motor vehicle, and student loan debt, “increased by $193 billion, or 1.4 percent, to reach $14.15 trillion in the fourth quarter of 2019.”
Household debt overall has been on the rise since mid-2013. Growth in auto lending is a big contributor to this increase, as auto loan balances have been growing steadily for several years. The average new account balance reached $22,232 in the third quarter of 2019, a year-over-year growth of 3.3%. Auto originations are also growing, with a year-over-year growth rate of 4.3% in the third quarter of 2019, representing 7.5 million new accounts. Other trends in motor vehicle lending include:
Given that the majority of auto loans to subprime lenders are originated by auto finance companies, it’s not surprising to learn that the delinquency rate is rising more sharply among loans issued by auto finance companies compared to delinquency rates for loans issued by banks, which tend to lend to borrowers with higher credit scores. While the delinquency rate for bank auto loans has been improving since the financial crisis, the delinquency rate for auto finance companies has been rising steadily since 2014, growing by more than two percentage points.
Graphic via Liberty Street Economics
Likewise, delinquency rates for borrowers with credit scores of 660 or higher have remained relatively steady, while delinquency rates among borrowers with subprime credit scores are rising – particularly among subprime borrowers with loans issued by auto finance companies. Overall, more than 23 million consumers hold subprime auto loans.
The leading cause of bankruptcy in the U.S. isn’t credit card debt, motor vehicle loans, or student loans – it’s unpaid medical bills. A survey conducted in 2016 by the Kaiser Family Foundation and New York Times found that 20% of Americans with health insurance have difficulty paying their medical bills, while among those who are uninsured, 53% have serious financial challenges in trying to pay medical bills. Thirty-eight percent (38%) of those who have trouble paying medical bills increased their credit card debt as a result. Additionally, among those with health insurance who face difficulty paying their medical bills:
Graphic via KFF.org
Among the uninsured, these percentages are typically as large or larger than the above. How much do these individuals typically owe?
About 60% of people who have difficulty covering unpaid medical bills say they’ve been contacted by a collection agency within the past year. A separate survey, conducted in 2015 by NPR, Robert Wood Johnson Foundation, and the Harvard T.H. Chan School of Public Health, found that 7% of respondents had declared bankruptcy within the previous two years as a result of their difficulty paying medical bills. Twenty percent (20%) took out a loan to cover medical bills that they’d have difficulty paying back, while 23% racked up additional credit card debt.
A recent survey by Bankrate in 2019 found that 6 in 10 Americans would struggle to pay an emergency expense of $1,000. In other studies, nineteen percent (19%) of those said they wouldn’t be able to pay an unexpected $500 medical bill at all, while 20% said they’d put it on a credit card that they’d be able to pay back over time.
Surprisingly, the median amount of money owed in accounts in collections is not in the thousands of dollars; it’s $366. The average amount owed among accounts in collections is just $1,000. Among medical bills specifically, those figures are even smaller: the median amount of an unpaid medical bill collections tradeline is $207, with an average of $579.
Debt collection practices, including the use of third-party debt collection agencies, differs from industry to industry. We’ll use the credit card industry as a case study to examine common debt collection practices and trends.
Credit card debt comprises the majority of revolving credit, and it represents nearly one-fifth of all outstanding non-mortgage consumer debt (19% of outstanding non-mortgage consumer debt, or 6% of all outstanding consumer debt) as of December 2019. The Consumer Financial Protection Bureau issued a report to Congress on The Consumer Credit Card Market in December 2017. Much like other industries, outcomes of credit card lending vary between borrowers with subprime credit scores and those with higher, or prime credit scores. “As of the fourth quarter of 2016, consumers with superprime credit scores account for a predominant 81% share of the amount spent using credit cards, which is significantly higher than their 65% share of accounts,” according to the report. “Consumers with prime scores account for the next largest share of spend at 14%, which is smaller than their 19% share of accounts.”
At the end of 2016, the average credit card balance was $4,800, and by 2019, consumers owed an average of $6,194. Since 2009, the average per-consumer credit card debt has increased by 6%. Delinquency rates have remained relatively stable, with slight increases between 2016 and 2019.
Screenshot via Experian
Credit card holders with credit scores near the middle of the range have higher balances on average. In the second quarter of 2019, average balances for credit score brackets were as follows:
In terms of delinquency, the CFPB report finds that:
More recent data from TransUnion’s Industry Insights Report, as reported by CreditCards.com, finds that the credit card delinquency rate (90+ days overdue) increased slightly between the third quarter of 2018 and the third quarter of 2019, from 1.71% to 1.81%. This figure is more than a full percentage point lower than the peak rate of 2.97% in the fourth quarter of 2009.
Despite these promising statistics, delinquency is nonetheless a prevalent concern in the credit card industry, and credit card issuers must implement debt collection practices to recover these outstanding debts. The CFPB report summarizes the debt collection methods used by credit card issuers including:
Various contact strategies are used by issuers to collect pre-charge-off debts, including:
Credit card issuers offer a variety of programs to help consumers repay their debt in order to mitigate potential losses from delinquent accounts:
Typically, once an account is 180 days or more past due, an issuer will charge-off the account. At this stage, issuers implement one of several strategies:
The CFPB reports that the size of issuers’ third-party collection networks (which includes agencies and law firms) has decreased over the past two years, declining from 127 unique collectors across issuers in 2015 to just 105 unique collectors across issuers in 2017.
Among consumers with multiple accounts from the same issuer, the share of total pre-charge-off dollars ranged from 10% to 67% in 2016. The average balance, among issuers that pursued litigation on accounts that were charged-off in 2016 was $6,700. The sale of charge-off debt is also declining, with fewer issuers selling off charged-off debt in 2015 and 2016 than in years prior. Among issuers that continue to sell debt, however, many planned to increase the sale of charged-off debt in the coming year.
Debt collection remains a major need in the credit card industry, as well as other lending industries. The 2019 Financial Literacy Survey conducted by the National Foundation for Credit Counseling found that:
While consumer spending and borrowing is strong in recent years across many sectors, lenders across every industry will continue to refine their collections approach using a mix of practices, technologies, and services to increase recovery. In the end, it’s a win-win for consumers, too, as paying off delinquent debt improves a consumer’s financial situation, coupled with the benefits of effective collection practices to borrowers overall, from lower interest rates to expanded access to credit as lenders are willing to take more risks on traditionally higher-risk borrowers.
It’s no secret that Covid-19 has, and will continue to, affect every industry, including debt collectors. As more and more individuals and businesses default on loans, collection isn’t necessarily legal in many states. For most states during a shutdown, debt collection isn’t an essential business. Other industries and debts are explicitly forbidden to collect. For instance, in New York courts will consider no foreclosures and evictions for the foreseeable future.
While there are current executive orders and courts reducing debt collection practices, many are calling for more action. In a recent letter to Governor Cuomo of New York, 63 community leaders “call on New York to institute an immediate moratorium on debt collection in our state, as part of a broader set of emergency measures needed to protect public health and safety and financial security, during this unprecedented crisis.”
Unfortunately, the statistics don’t yet show the effect coronavirus will have on the debt collection industry. Economists will likely study this for years to come. By the time the economy does begin the recovery process some executive orders, court decisions and even legislation may change debt collection practices for a time. The only course of action, in this case, is to monitor state and federal decisions.
There are a variety of valuable resources and organizations that conduct research into consumer debt, regulate debt collection practices, and offer insights on best practices. For more information on the debt collection industry, visit the following resources: