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Comparing Cardmember Default Outcomes for Lenders

Defaults are coming. Unfortunately, there doesn’t seem to be a way around it right now. With no end in sight to the stimulus package conversation in Congress, new layoffs, and lack of a rebound in the job market, there’s a long road ahead for many Americans.

A lot of people are turning to loans and credit cards to make it through this period, which means that here in a few months, we’re likely to see a continually rising number of credit card and loan defaults. There are a few different ways that debtors can deal with this issue – some of which are more beneficial to lenders than others.

Bankruptcy and Debt Settlement

In 2019, credit card charge-offs cost lenders nearly $38 billion. While this is substantially better than the $85 billion cost in 2009, after the housing market crash, it’s still not ideal. This number is very likely to start growing again in 2020 and 2021 as a result of sweeping job loss.

Whenever cardmembers resort to bankruptcy or debt settlement, it means a loss for you as a lender. There are times when other options aren’t feasible for your cardmembers – if they’re too far in debt or there’s no chance for them to make a regular income again in the near future.

In those cases, bankruptcy or debt settlement are unavoidable. However, for thousands of people, charge-offs do not need to (and should not) be the first option. Both bankruptcy and debt settlement can cost more for lenders and consumers in the long run.

Some of the ramifications of bankruptcy for your cardmembers can include:

  • Mortgage rate increases between 1.5% and 6%

  • Drop in credit score of 220-240 points

  • 10 years of negative effects on credit score

Debt settlement can also cost debtors a significant amount of money in the long run, especially if they have to stop paying on their debts altogether to save up enough money to be able to pay a lump sum at settlement.

Additionally, the charge-off negatively affects the lender and results in a lowered credit score for the cardmember. Debt settlement can make sense in the right situations, but it shouldn’t the first solution.

Debt Management Plans (DMPs)

For cardmembers who have a source of income, a debt management plan (DMP) can be a good resolution for excessive debt. In order to get access to a DMP, cardmembers first have to go through credit counseling with a non-profit CCA.

Whether they choose the DMP or another form of debt settlement, attending credit counseling gives the cardmember a stronger education on debt management, which is why it should always be the first option.

Additionally, when a cardmember chooses a DMP, it won’t cost your institution a significant amount of money or result in a charge-off. The effects on the cardmembers credit score will also be less detrimental.

Talking to Your Cardmembers About Default Options

You should begin the conversation about default as soon as a cardmember is at risk. Letting your cardmembers know that debt relief is available and that they have options can prevent them from burying themselves further or avoiding the issue altogether out of fear of what happens next.

Education is critical for savings on both sides. Send snail mail and emails and make phone calls. Just make sure that your cardmembers know that they have options that don’t always have to start with bankruptcy or debt settlement.

Need help managing debt management plans or credit counseling agencies? Peregrin can help. Give us a call today at 1-800-231-2493 or contact us online for more information.

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