The Finances of Debt Collection

You aren’t going to believe this, but it’s true.  Here is the secret behind debt collection:  creditors want their money!  OK, I am being kind of irritating there, but that is what drives debt collection.  How the process works, however, is pretty interesting.When you apply for debt, the creditor decides if you are credit worthy.  They do this based on your income, your past payment history, your line of credit to used credit ratio, and your credit scores.  It takes a computer about 1 second to make this decision.  If they, or it, decide you are worthy, then you will be issued credit.  This comes, however, with some protection for the creditor.In your credit agreement, you explicitly agree to pay the creditor back.  They are pretty determined that this will go in their favor, as this is how they make their money.  However, you may experience a period in your life where you don’t pay the debt back.When this happens, the creditor tries to get in touch with you.  They usually have an internal department call an Internal Recovery Unit (IRU) that is responsible for going after very collectible debt.  These are the phone calls that you get when you are 30 or 60 days past due.  You see, the creditors still consider this very collectible.  They usually don’t report a problem for 60 days to the credit bureaus, although individual firms have their own policies on this.  They just want to collect their money and keep you as a credit customer.With some debtors, a bank will be more lenient.  If you have an excellent payment history, and are suffering some temporary hardship like a job loss or medical problems, some banks will give you 150 days or more to start making payments again.  In these cases, they recognize your worth as a customer and want to keep you.  It is very expensive to acquire a new customer, often costing hundreds of dollars in advertising, promotions, list acquisition, and other fees just to land a single customer.  As long as the creditor is making money from you, they want to keep you around.In the case of the creditor wanting to keep you, they will have their IRU do the collections.  At some point, however, it becomes too costly to carry the debt, and they decide to sell It to a collections firm.Typically, debt is charged off after a 90 day delinquency.  This debt, between 90 and 120 days old, is called ‘fresh’ debt, and collectors love it.  They would much rather collect on this debt than on older, ‘stale’ debt.  Fresh debt can return 60% or more actual collection revenues.  This is a huge boon to the collection agency, as they buy the debt for less than that.Periodically, an IRU at a creditor will be overwhelmed, and the creditor will charge off the debt early, and pass that debt on to a collection firm.  This debt, known as IRU, is what collectors dream about.  It is very collectible, and has a high return rate on the dollar spent.So, why is a creditor so interested in keeping their debt and collecting it internally?  They lose a lot of money if they sell it off.  A typical ‘fresh’ debt portfolio, with debt ages of 90 to 120 days, sells for about 40 cents on the dollar.  So, they collector can make up to 150% profit, assuming they could collect all of the debt.  The debt collector also adds fees and interest to the collectible amount, so they are able to pad their profits nicely.Debt can also go out as ‘contingent’ debt to a collections firm.  In this case, the original creditor keeps the account, and they pay a commission to the collector for each dollar collected on the original amount.  The original creditor has the ability to recall that debt per the contract, and can reassign it to another collector, or to their internal collections, if they aren’t happy with the performance of the collection agency.If a creditor can collect on their own debt, they get more money back, and get to keep the customer.  They will also be charging a higher interest rate because of the increased risk, so they make money fairly quickly on collected debt.  It makes sense for the original creditor to try to keep collecting on their debt, but ast some point they decide you are not worthy of being their customer, and they accept a loss on your original credit in order to get some of their money back and continue their profitable business.

To get a copy of my FREE e-Book ‘The Top Ten Ways You Can Wreck Your Credit’, just click the link.  You will be taken to a page where you can get more information about downloading the e-book.  This book tells you what you should avoid doing concerning your credit, and what negative impacts can occur if you treat your credit wrong.