Collections Strategies in a Rising Delinquency Environment
Banks face mounting challenges as consumer credit delinquencies reach their highest levels in five years. In fact, according to the Federal Reserve Bank of New York, total household debt increased to $18.04 trillion in Q4 2024, with delinquencies among auto loans particularly elevated. The 60-plus day delinquency rate for auto loans increased to 2.96% in Q4 2024, up from 2.66% a year earlier, while credit card delinquencies jumped from 6.36% to 7.18% during the same period.
VantageScore's January 2025 report confirms this trend, indicating that credit account balances surged by more than $1,000 compared to December 2024 – the largest month-over-month increase in nearly three years.
Susan Fahy, Executive Vice President at VantageScore, notes that "the combination of rising mid-to-late-stage credit delinquencies and rising credit balances suggests a growing debt burden that some consumers are increasingly struggling to manage."
Banks must adopt more sophisticated, technology-driven strategies that can effectively address rising delinquencies without damaging valuable customer relationships.
Effective Collection Strategies for the Current Environment
To navigate this environment, technology and processes for effective collections management is critical, including preventative measures. This is possible with predictive analytics, helping banks identify at-risk accounts before they become delinquent.
Advanced models like charge-off risk scoring systems can forecast risk levels for delinquent accounts, enabling banks to prioritize resources accordingly. By analyzing account holder information across various data points, these systems help guide lower-risk accounts into automated processes while allowing skilled staff to focus on higher-risk cases.
This also supports a better, less aggressive interaction with customers. When approached aggressively, not only is the customer experience negatively impacted – which can tarnish a bank’s reputation – it also hinders the collections process itself. We know that consumers tend to avoid aggressive tactics, like ones used by outsourced debt collectors. It also goes against a community bank’s mission for being community- and customer-centric.
Additionally, automating the collection process significantly improves efficiency and reduces costs. By streamlining communication across multiple channels, banks can handle larger volumes of accounts without sacrificing quality. Modern collection platforms incorporate early-stage text and email payment reminders, self-service payment portals, automated call campaigns with intelligent scheduling, and digital document collection and processing.
Banks also need a consolidated database to manage all assets and accounts, providing a comprehensive view of each customer's financial situation. This holistic approach allows for more effective communication and more appropriate solutions tailored to individual circumstances. When banks can see the complete relationship rather than just a single delinquent account, they can develop more sustainable repayment options.
While automation offers efficiency gains, the human element remains crucial. Staff should be trained to communicate with empathy and understanding, offer customized payment solutions based on individual circumstances, listen to customer challenges, provide appropriate financial education, and focus on relationship preservation alongside debt recovery. As mentioned earlier, aggressive tactics make recovery more challenging and also puts the entire customer relationship at risk.
Using custom dashboards and reporting tools also helps track effectiveness and identify opportunities for improvement. Key metrics to monitor include delinquency reduction rates by stage, payment plan success rates, cost per dollar collected, and customer satisfaction scores. This data-driven approach ensures resources are allocated to the most effective strategies.
Looking Forward
In today's rising-delinquency environment, banks must balance automated technology with human connection. By combining predictive analytics, integrated data systems, and empathetic customer engagement, banks can effectively manage rising delinquencies while preserving valuable relationships and improving long-term recovery outcomes.
About Author:
Jeff Harper is Chief Growth Officer for FIntegrate Technology, a leading provider of innovative software that addresses the critical need for automation in credit and collections management, dispute management, and data migration