We've been through two years of low delinquent and defaulted account levels, which made collecting from consumers relatively easy. But now? Collections & recovery executives shaping their collections strategy for 2023 and beyond need to consider that while consumers are generally making more money, and are mostly financially healthy, they’re also spending more money on necessities like energy and food, and increasinly, they will likely prioritize secured loans above paying off or making payments on their credit cards.
How can you adjust your strategy to accommodate a higher volume of more difficult paper? That could mean diversifying your strategy to include debt sale or a legal strategy. It could also mean onboarding a new third-party agency partner, or evaluating the need for outsourcing your first-party work.
No matter how you adjust your strategy going into '23, however, there are three metrics you absolutely need to track, according to Ryan Boyle, a macroeconomist at North Trust, who appeared recently on TransUnion's Extra Credit: a Card and Banking Podcast.
1. New Unemployment Claims
The current nationwide unemployment rate remains relatively low at 3.5%, and most people who are laid off are able to find unemployment quickly. But Ryan Boyle, a macroeconomist at North Trust, recommends checking the weekly initial claims for unemployment insurance to get a real sense for what’s happening.
The weekly initial claims, which are available every Thursday morning for the prior week, are an “economic smoke alarm” according to Boyle. “It tells you there is an immediate problem, it won’t prevent a fire, it won’t help put it out, but at least you will know,” he says.
As of this writing, the initial unemployment claims were up slightly, from 214,000 to 217,000, and the monthly average was also trending up. Boyle isn’t worried just yet. The numbers are consistent with the unemployment figures we saw in 2016-2018, which was “a very good time” for labor markets, according to Boyle.
2. Wage Gains
After an abysmal 2020, 2021 saw record wage gains, including an increase of 6.1% for the lowest-income workers. This sounds like good news for the average consumer, but these gains are pitted against inflation, and frankly, inflation is winning.
Boyle advises to monitor wage gains in the context of inflation, and says “people are falling behind on a real basis. In pre-COVID we saw gains of 2-3%, and inflation of 1-2%,” which means people were actually getting ahead in real terms. In 2022, we’re seeing wage gains of 5-6%, and inflation is at about 8%.
“People are falling behind,” says Boyle.
Credit use is trending up, but that means it’s normalizing, and Boyle says that’s not necessarily a cause for concern, especially when we consider that stimulus packages and spending went “haywire” in 2020 and 2021. Consumers were flush with cash and were able to pay without using credit, and now that’s reverting back to normal. Credit card spending has returned to its pre-pandemic levels, and missed payments are increasing, but are not at alarming levels, yet.
Boyle says while delinquencies are rising for subprime borrowers, that isn’t a red flag just yet, because they appear to be reverting back to the mean. He considers it “normal.”
It’s also important to keep an eye on secured delinquencies, like auto loans, as consumers tend to pay secured loans ahead of credit card balances. Auto delinquencies are up: 3.34% are 30 days past due in Q2 2022, compared to 3.12% in Q2 2019. That rate was even lower in 2020 and 2021, but those years were anomalies in many ways. More concerningly, the 90+ day past due rate as of Q2 2022 is .79%, compared to .41% in Q2 2019. As consumers get further behind on secured loans, it will mean fewer are able to pay their credit cards, and it could lead to a major uptick in defaulted and charged off accounts.
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