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posted on 04 July 2015

Debt Collection Agencies And The Supply Of Consumer Credit

by Philadelphia Fed

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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