The New York Federal Reserve recently reported that household debt climbed to $15.8 trillion in the first quarter of 2022. This represents a $266 billion increase from the previous quarter and is $1.7 trillion higher than it was just at the end of 2019.
A major storyline in the initial months of Covid was Americans’ ability to stay current on their debt obligations during that tumultuous time. However, many experts (including our CEO Louis Ochoa) warned at the time that these positive numbers were being masked by a number of factors and that lenders should be prepared for a rise in delinquencies.
These expert prognostications are beginning to become reality across various credit types and consumer profiles. For example, the Federal Reserve has reported an increase in credit card delinquencies across the board, with companies such as CapitalOne and Synchrony recently citing increases in delinquencies or charge-offs. Ford Motor Credit Chief Financial Officer John Lawler commented this month that they are starting to see delinquencies increase. And in the subprime market, Equifax reports 11.3% of personal loans and lines of credit being 60 days or more past due.
Prior to these numbers being released, The Wall Street Journal published a cautionary and now accurate article titled “Americans Were Great About Paying Their Debts in the Pandemic. Don’t Expect It to Last.”
As a company that is responsible for the overall health of our clients’ portfolios, including keeping accounts current, these are issues that Servicing Solutions pays close attention to. In an inflationary economic environment, having a skilled and experienced collections team in place is absolutely imperative.
A LendingTree study found that 48% of consumers that have added to their debt cite inflation as the driving factor. We expect that to translate to the collections environment as stressed consumers will reference the increased cost of goods and services, coupled with rising interest rates, for the reasons behind delinquency.
In my experience, these are the key considerations to keep in mind in an economic climate like we are experiencing today:
- Communicate Regularly: Regular and proactive communication is a key to any successful customer experience and debt servicing program. During times of rising delinquencies, this is even more critical. Developing a relationship with customers who become familiar with you will dramatically increase their motivation to keep current.
- Educate: Consumers who are struggling are likely faced with decisions on which bills to pay. This can lead to bad short-term decisions to skip a payment on a revolving line of credit, for example. Educating the customer about the long term effects this will have on credit scores and the cost of future borrowing will go a long way towards encouraging them to reach an arrangement that is suitable to them and the lender.
- Be Understanding: There isn’t a customer in the world who is proud of being late on a bill. Being judgmental, insulting, or threatening rarely motivates a customer to communicate. It will typically have the opposite effect and often leads to complaints and escalations. Empathize with your customers and show them that you are there to help.
- Solve Problems: Using the information gathering process as a guide, a trained agent will quickly be able to determine what payment arrangements are realistic for the customer and satisfactory to the lender. That same LendingTree study showed that 72% of past-due customers requested a late fee waiver, and that 88% of those customers were successful in doing so if they made payment arrangements. Providing flexibility and offering customers an incentive to become current will strengthen relationships.
- Use Positive Language: Negative language has no place in the collections environment. In fact, replacing negative language with positive language is far more effective. Instead of focusing on the late payment itself, acknowledge a customer for having made the first several payments on time or explain the good things that will come along with being current.
Ready to “Invest In Real Experience” to navigate the complexities of debt collections in an inflationary economy? We can help. Drop us a line at firstname.lastname@example.org