Revolving debt (commonly known as credit cards) is one of the largest types of unsecured consumer credit in the United States, with 38.1% of American families carrying credit card debt in 2013, for a total of $857.6 billion outstanding.
As with any debt, the willingness of lenders to provide credit card loans relies on the presence of enforcement mechanisms that allow creditors to pursue a defaulting borrower's income and assets (Djankov, Hart, McLiesh, and Shleifer (2008)). Between 2001 and 2013, on average 10.1% of outstanding credit card debt was more than 90 days delinquent, compared with 8.0% for student loans and 3.8% for mortgage loans.2 This relatively high default rate implies that debt enforcement mechanisms may be particularly important for revolving debt.
Once a credit card loan is in default, lenders typically initiate the process of debt collection. It involves attempts to obtain repayment from defaulting borrowers and can be of two types: in-house debt collection (in which creditors try to collect the debt on their own) or third-party debt collection (in which creditors outsource debt collection to third-party agencies). Initially, most creditors start collecting on their delinquent accounts in-house and, if unsuccessful, later transfer these accounts to third-party agencies (Federal Trade Commission (2009)). These third-party agencies then contact borrowers and attempt to obtain repayment from them on behalf of the creditors.3 Most debt collection agencies work on commission and retain a portion of the amount they collect for the creditors.
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