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 approximately 30 million Americans 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 2018. 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 into 2018 and beyond.
In this guide, we’ll discuss:
- Debt Collection Industry Statistics
- The Role of Debt Collection and Third-Party Debt Collection Services
- Industries with the Largest Consumer Debt
- Auto Lending Practices Impact Delinquencies
- Medical Debt: The Leading Cause of Bankruptcy in the U.S.
- Debt Collection Practices
- Additional Debt Collection Industry Resources
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 305,700 jobs for bill and account collectors as of 2016. However, the industry is expected to experience a decline of about 3% between 2016 and 2026, with a loss of about 9,100 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. Aggregate household debt is expected to continue to grow through 2022, resulting in an increase in potential revenue sources. However, the debt collection industry must cope with upcoming regulatory changes by the Consumer Financial Protection Bureau.
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 $3.5 trillion in total outstanding consumer credit as of October 2015. In the U.S. household participation in the major consumer credit markets is approximately:
- Credit Cards: 70%
- Mortgages: 45%
- Auto Loans: 30%
- Student Loans: 19%
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 Q3 2015, by loan type, includes:
- Mortgages: 2.3%
- Student Loans: 11.6%
- Auto Loans: 3.4%
- Credit Cards: Approximately 8%
A report from the Federal Reserve Bank of New York states, “As of December 2015, $652 billion of outstanding household debt was in some stage of delinquency, and approximately two thirds of those balances were at least 90 days late.”
The Role of Debt Collection and Third-Party Debt Collection Services
According to ACA International, “As of the third quarter of 2015, there was $12.07 trillion in outstanding consumer debt; $672 billion of that debt is at some stage of delinquency (FRBNY, 2015).” 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.
Graphic via ACA International
According to the ACA, data from 2013 reveals the portion of debt collection activities industries outsource to third-party debt collection agencies:
- Healthcare: 37.9%
- Student Loans: 25.2%
- Financial Services: 12.9%
- Government: 10.1%
- Retail: 3.1%
- Telecom: 3.2%
- Utility: 2.2%
- Mortgage: 2.0%
- Other: 4.7%
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. have 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.
Industries with the Largest Consumer Debt
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:
- Credit Card Debt: The average household in the U.S. has approximately $15,000 in credit card debt. In September 2017, 7 million credit cards originated, with an aggregate credit limit of $29.2 billion. This is a 15.5% decrease in year-over-year originations.
- Student Loans: Graduates in the U.S. today graduate with an average of $29,000 in student loan debt. In September 2017, 5 million student loans originated, with an aggregate volume of $19.8 billion, marking a 0.2% decrease in year-over-year originations.
- Medical Bills: More than 20% of U.S. households have unpaid medical debt. The average amount of a medical bill in collections is $579, with a median of $207.
- Mortgages: Average mortgage debt in the U.S. is about $150,000 per household. In September 2017, 719,782 mortgages originated, comprising $189 billion in mortgage lending volume. This is an 11.3% decrease in year-over-year mortgage loan originations.
- Auto Loans: In September 2017, 2 million auto loans originated, resulting in $49.7 billion in new loans, marking a 1.1% decrease in year-over-year originations.
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 $29,000 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 (October 2017), the major holders of outstanding consumer credit include:
- Depository Institutions: $1,563.9 billion
- Finance Companies: $525.5 billion
- Credit Unions: $420.2 billion
- Federal Government: $1,141.6 billion
- Non-Profit and Educational Institutions: $37.3 billion
- Nonfinancial Business: $43.1 billion
- Pools of Securitized Assets: $52.7 billion
Revolving credit comprises $977 billion of the total outstanding consumer credit as of October 2017, while non-revolving credit comprises $2,807.1 billion of the total. As of September 2017, according to the Federal Reserve Board’s data, $1,486.2 billion of total outstanding consumer credit consists of student loans, while $1,108.1 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 third quarter of 2017, finding that household debt has reached a new peak driven primarily by gains in mortgage, motor vehicle, and student loan debt, “rising $116 billion to reach $12.96 trillion, $280 billion above the previous 2008 third quarter high.”
Graphic via NewYorkFed.org
Specifically, in the previous quarter, balances grew by:
- Mortgage balances: 0.6%
- Auto loan balances: 1.9%
- Credit card balances: 3.1%
- Student loans: 1.0%
In the third quarter of 2017, aggregate household debt balances grew by $116 billion, to a total of $12.96 trillion. This marks an excess of $280 billion above the previous peak in the third quarter of 2008, 16.2% higher. Most household debt, unsurprisingly, is comprised of mortgage loans. As of September 30, 2017, the aggregate mortgage debt reached $8.47 trillion, marking a $52 billion rise over Q2 2017. Home equity lines of credit (HELOC) balances, however, declined slightly, at $448 billion as of September 30, 2017.
Auto Lending Practices Impact Delinquencies
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 26 consecutive quarters, attributed in part to record numbers of new auto loan originations. Following a dip in sales in the first half of 2017 after several years of growth, in September 2017, the automobile sector rebounded with the fastest rate of sales in 12 years, and sales in October 2017 remained strong, as well. By the end of October, 18 million vehicles had been sold and loan originations in Q3 were on par with these sales figures. Other trends in motor vehicle lending include:
- The number of subprime auto loan originations increased in 2016, despite rising delinquencies.
- There was a slower rise in auto loans to borrowers with lower credit scores in 2017 compared to 2016, although the number of loans to subprime borrowers continues to rise.
- Lending to borrowers with higher credit scores is growing at a similar pace compared to 2016.
- Historically, auto finance companies originate and hold more than 70% of subprime auto loans.
- The share of subprime loans originated by auto finance companies has doubled since 2011, now standing at more than $200 billion.
- The outstanding balances of bank auto loans, on the other hand, is comprised mostly of loans originated to borrowers with higher credit scores.
- Outstanding subprime auto loan debt (borrowers with credit scores of 620 or lower) is about $300 billion.
- The total outstanding subprime auto loan debt is rising steadily in dollar amount, but it has been comprising about 24% of total outstanding auto loan balances since 2011. So, while the total dollar value continues to rise, the portion of total auto loan debt made up of subprime loans has remained relatively steady for several years.
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 (around 20110, 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.
Medical Debt: The Leading Cause of Bankruptcy in the U.S.
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:
- 63% say they used up all or most of their savings to cover medical costs
- 77% delayed vacations or other major purchases
- 75% spent less on clothing, food, and other essentials
- 42% picked up more hours at their job or took on a second job
- 37% borrowed money from family or friends
- 14% changed their living situation
- 11% sought the aid of a charity
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?
- 31% say their medical bills totaled $5,000 or more
- 13% say they owed at least $10,000 in unpaid medical bills
- About 1 in 4 (26%) have less than $1,000 in unpaid medical bills that they have difficulty paying
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 poll conducted by the Kaiser Family Foundation in 2017 found that 45% of Americans would struggle to pay an unexpected medical bill of $500 or more. 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
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 more than one-fourth of all outstanding non-mortgage consumer debt as of December 2016. 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, a figure that has remained relatively stable through 2017. Since Q2 2015, the average per-consumer credit card debt has increased by 9%, while average balances among consumers with lower credit scores have increased substantially. Among consumers with deep subprime credit scores, for instance, the average balance has increased by 26% during the same period. Still, credit card holders with prime credit scores have significantly higher balances on average, and have so consistently, than any other credit score group, with an average balance of more than $8,000 per cardholder over a recent four-quarter period. In contrast, cardholders with deep subprime credit scores have an average of more than $2,700 in credit card debt during the same four-quarter period.
Graphic via Consumer Financial Protection Bureau
In terms of delinquency, the report finds that:
- There was no significant increase in severe delinquency rates (missing three or more minimum monthly payments, meaning 60 days or more delinquent) associated with the recession.
- Severe delinquency rates have declined substantially beginning in 2011.
- Delinquency rates for general purpose cards decreased more compared to private label cards, currently between 8% and 9%.
- The highest delinquency rate among general purpose cards was in 2010, a peak of more than 14%.
- The current delinquency rate for private label cards is around 4%, which is the lowest rate in more than 10 years.
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 report summarizes the debt collection methods used by credit card issuers including:
- In-house collectors are often used for initial collections activity.
- Some issuers combine in-house collections representatives with first-party collectors, who collect in the card issuer’s name.
- Issuers engage with third-party collection agencies to handle certain types of accounts, such as those classified as late-stage or high-risk.
- In the previous two years, issuers tend to rely more on in-house or first-party collections resources rather than engaging third-party collections agencies.
Various contact strategies are used by issuers to collect pre-charge-off debts, including:
- Some issuers limit contacts to three times per day, while others permit up to 15 contact attempts daily. In the CFPB’s 2015 report, the lower limit averaged four contact attempts per day.
- In 2016, the average number of call attempts per day across issuers was 2.4.
- Issuers typically have programs in place to accommodate limited English proficiency borrowers when contacting these consumers about delinquent debt by phone.
Credit card issuers offer a variety of programs to help consumers repay their debt in order to mitigate potential losses from delinquent accounts:
- Issuers are shifting from short-term programs to enrolling consumers in long-term programs within the past two years.
- The inventory of balances in loss mitigation programs experienced a sharp rise following the recession, although inventory has been declining slightly as consumers exit these programs or pay off their debts.
- Most issuers have policies against working with third-party debt settlement companies, instead preferring to enroll consumers in their own in-house loss mitigation programs.
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:
- Continued collections via in-house resources
- Outsourcing collections to third-party agencies
- Selling accounts to debt buyers
- Pursuing litigation
- Warehousing the account (hold the account while engaging in no further collections efforts)
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 2016 Financial Literacy Survey conducted by the National Foundation for Credit Counseling found that:
- 1 in 3 households in the U.S. carry credit card debt from month to month (35%, an increase from 33% in 2015).
- More than 1 in 10 adults in the U.S. roll over $2,500 or more in credit card debt from month to month (14%, compared to 11% in 2015).
- 18% of U.S. adults have applied for a new credit card within the past 12 months.
- 7% of U.S. adults have been rejected for a new card in the past 12 months.
- 7% of adults in the U.S. have made one or more late credit card payments in the past 12 months.
- 5% of adults in the U.S. have made a credit card payment in an amount less than the minimum required payment.
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.
Additional Debt Collection Industry Resources
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:
- ACA International – Industry Research and Statistics
- Credit and Collection News – Industry Trends
- Investopedia: The Debt Report: The Consumer Staples Sector
- Statista: U.S. Personal Debt – Statistics & Facts
- CreditCards.com: Credit Card Statistics
- Debt.com: Debt Collection Statistics
- National Consumer Law Center: Consumer Debt Collection Facts
- InsideARM: CFPB Releases Long Awaited Report on Consumer Debt Collection Survey
- ConsumerFinance.gov: Study of third-party debt collection operations
- BYL Collections: Consumer Debt Collection – It’s More Common Than You Think
- ComplianceWeek: CFPB highlights debt collection complaint statistics
- Bureau of the Fiscal Service: Debt Collection Statistics: Comparison of Net Collections from Treasury Offset Program for Calendar Years 2016 and 2017
How does your company respond to shifts and trends in the debt collection industry?