Americans Face Greater Debt Burdens
Not surprisingly, with the economy slowing and unemployment rising, Americans face a tougher time paying their bills.
And that could mean growing business for companies that specialize in credit collection.
The average household is burdened with $8,000 in credit card debt, an all-time high, according to Tim Raftis, vice president at InCharge Institute, the country’s biggest nonprofit provider of credit counseling services.
“We are seeing rising delinquencies in broad categories of debt,” said David Coulter, chief executive officer at Junum Inc. a credit service and management company in Costa Mesa.
Moreover, for the first time in three years, the number of Americans who were late in paying their credit card bills increased in December, ratings agency Moody’s Investors Service said last week.
Collection-industry executives predicted that their business will pick up in the coming months, as more loans turn bad and companies rely on them to recover money from delinquent borrowers.
“Historically, a bad economy always helps us a little bit,” said Brian Callahan, director of financial reporting at NCO Group Inc., a leading provider of collection services in Fort Washington, Pa.
There are more than 60,000 debt-collection companies in the United States, most of them small private firms. They recover about $26 billion a year from delinquent borrowers.
Last summer, as the U.S. economy started showing early signs that its torrid pace was cooling, debt-collection firms started facing more difficulty getting borrowers to pay up.
At that time, NCO warned of “adverse changes” in payment patterns for both consumers and businesses.
“Since last August, we are meeting our numbers, but it’s getting harder to collect,” Callahan said.
Until recently, Americans were enjoying the longest U.S. economic expansion ever, accompanied by the tightest job market in three decades and trillions of dollars of wealth created by booming stock prices and a sizzling real estate market.
The downside of this prosperity has been the mountains of new debt left from Americans’ decade-long spending binge.
American indebtedness stands at its highest level since the late 1980s. In the second quarter of 2000, the latest data available from the Federal Reserve show, a typical household spent 13.7% of its income to make mortgage and other debt payments, matching the level in the fourth quarter of 1987.
The consumer debt level is riding a record high, totaling $1.52 trillion in credit card bills, auto loans and other types of consumer borrowing at the end of November, nearly double the amount of a decade ago, the Fed said.
Moody’s measure of delinquency rates on credit card portfolios rose to 4.9% in December from 4.84% in November, the first increase in three years. The late-payment rate was above year-ago levels.
“Nonetheless, it is too soon to determine whether the delinquency rate will stabilize or increase further,” Moody’s analyst William Black said in a report.
Consumers’ ability to pay off their loans is linked to their jobs. And the labor picture has deteriorated in recent weeks. “Old-economy” stalwarts such as retailers and car makers announced plans to lay off thousands of workers on top of dot-com layoffs last year.
“It’s a lot more of a finesse business,” NCO’s Callahan said, describing the current state of the collection industry, which has been driven by new information technology in recent years.
NCO plans to spend $20 million to $30 million on technology this year, equaling the level for 2000, Callahan said.
Junum buys bad loans from banks and other lenders and works with borrowers to restart paying on their defaulted loans at low monthly payments. In addition to receiving loan payments, Junum charges a monthly fee, ranging from $9.95 to $35.95. Junum works with credit bureaus to clear the credit blemishes of its customers due to defaults and delinquencies.
