After observing a steady upward trend in the US credit card delinquency rate in a time of historic lows for credit card delinquency, I set out to investigate the account default rates by analyzing the performance in lower bands of FICO Score and behavior score with current accounts. The results point to an opportunity for lenders to shift to an early collections intervention strategy via improved customer management strategies. In this blog, I explain this study in 3 parts:
US lenders are seeing an increase in credit card delinquencies over recent quarters, fueled in part by an overall rise in total household debt. From Q2 2017 to Q3 2017, total household debt in the US increased by $116 billion to $12.96 trillion. Debt levels increased across mortgages, student loans, auto loans, and credit cards; however the largest percentage increase (3.1%) was in credit card debt. In Q3 2017, the Federal Reserve Board of Governors reported a credit card delinquency rate of 2.49% (seasonally-adjusted) for the 100 largest banks, continuing a steady upward trend for the sixth consecutive quarter.
Given that these results are far from levels seen during the financial crisis of 2008-2009 (with 30+ day card delinquencies that approached 7%) and a strong economy with near full employment, lenders aren’t ready to hit the panic button just yet. These current historic lows for card delinquency have led some lenders to accept higher risk applicants, contributing to the slight delinquency uptick.
Curious about this continual increase, I examined opportunities related to early collections intervention for a prominent US card lender with approximately 6 million accounts as a means to mitigate risk introduced via aggressive balance growth programs instituted over the prior two years.
Most card issuers today have early-stage collection efforts that initiate after the billing cycle for the highest risk delinquent customer segments, leaving a period of four to five days between a missed payment due date and the onset of customer contact strategies.
Intuitively, failure to accelerate customer contact in these high-risk segments represents a missed opportunity. This point of contact may ultimately be the tipping point in collecting the debt and keeping an account from going into default.
A relatively simple analytic exercise can help lenders identify those customers who not only have a very high likelihood of rolling delinquent subsequent to a missed payment due date, but also have a significantly elevated probability of reaching a severe stage of default in the following six to twelve months.
Leveraging FICO’s Analytic Modeler Decision Tree Professional, a component of the FICO® Decision Management Suite, I studied performance for non-delinquent accounts that had drifted to lower bands of FICO Score and behavior. Specifically, my goal was to quantify the account default rates, defined as 3+ cycles past due, bankrupt, or charged-off over the subsequent twelve months (i.e., “bad” performance definition). The analysis showed that the lowest 10% of FICO Scores and behavior scores captures only 5%(*) of the total current account population, but identifies over 40% (**) of the future bad accounts originating from this current account segment.
(*) The sum of the “% of total” in the upper left highlighted 4 quadrants: lowest 5% and the lowest 6-10% (2% + 1% + 1% + 1% = 5%).
(**) The sum of the “% of total bads” in the upper left highlighted 4 quadrants: lowest 5% and the lowest 6-10% (24% + 8% + 5% + 3% = 40%)
This study leveraged cycle-based data for current accounts (accounts in good standing) as opposed to isolating only those accounts that miss their required minimum payment, which would have resulted in considerably higher bad rates across defined score intervals. However, the analysis validates the appropriateness and necessity of accelerating collections intervention – at the missed payment due date – within high-risk segments rather than initiating customer contact after the grace period.
The Results and Recommendations
Lenders will need to shift their business practices and consider operational implications when making these strategic decisions and they need to be vigilant about tracking performance shifts across key portfolio segments. Collections capacity planning and ensuring adequate staff training is critical to success.
From a tactical sense, adaptive control technologies such as FICO’s TRIAD Customer Manager and Strategy Director are easily configured to enable “pre-delinquent” account treatment which allows users to orient customer contact strategies around the payment due date. Notably, the introduction of self-resolution strategies via mobile application, automated voice, SMS, and email has gained remarkable traction in recent years as lenders strive to match engagement channel to customer preferences.
Both lenders and customers have benefitted from the proliferation of digital communications. Lenders have observed significant improvements in delinquent roll rates and dramatically lower collections-related expenses while customer satisfaction has improved. However, customers who do not react to these automated payment reminders and self-resolution channels are often signaling a state of financial distress that warrants rapid live-agent intervention.
I’m happy to field questions about this study and corresponding findings; comment here on the blog or contact Fair Isaac Advisors if you want to discuss innovative ways to create effective risk mitigation strategies which include early intervention tactics abating delinquencies. You can also reach FICO experts and other users in the TRIAD User Forum.