American consumers, especially those with low credit scores, appear to have benefited in recent quarters from broad changes in how third-party collection agencies report collection accounts to credit bureaus, according to new figures from the Federal Reserve Bank of New York. But the benefit could be short-lived.
The upshot for bankers? Don't let your guard down just yet on credit quality or
From 2008 to 2012, debts on consumer credit reports that creditors had turned over to third-party collectors rose as Americans struggled with financial hardships during the recession.
But between 2013 and 2017, the number of consumers with a collections account on their credit report fell gradually from 14% to 12%. Then it dropped sharply in recent quarters to 9.42% at June 30, the New York Fed said
Those debts were not wiped out, but rather, removed from the credit reports of approximately 8 million Americans. Among other things, the National Consumer Assistance Plan — a set of reforms adopted by the major credit bureaus — requires debt collectors to include more information along with debts that are reported to the credit bureaus like a date of birth or Social Security number in addition to a consumer’s name and address. They also must regularly update the status of unpaid debts and debts no longer being pursued for collection.
Additionally, medical debts will not be reported to the credit bureaus until after a 180-day waiting period, to give time for insurance payments to be applied.
The new practices also stipulate that debts that do not result from a contract or agreement to pay by the consumer, like traffic tickets, will not appear on credit reports.
The plan took effect in the latter half of 2017 and most likely accounts for the sharp drop in the number of Americans with a collection account on their credit report, from 33 million to 25 million.
As collection agencies get up to speed with those requirements, however, researchers expect some of those collection accounts to return to consumers’ credit reports.
To be sure, the majority of collections accounts tend to be either medical bills or unpaid utility bills, while defaulted loans made by banks usually make up a very small proportion (6%) of accounts that go to collections, the New York Fed’s team said.
But the changes still affect the credit profile of a sizable number of consumers.
The majority of those who had a collections account removed from their credit report saw just a minimal increase, or less than 20 points, in their credit score, but roughly 18% saw their credit scores increase by 30 points or more.
Elsewhere in the report, the New York Fed said that total household debt continued to climb, totaling $13.3 trillion in the second quarter — 3.5% higher than it was a year earlier. Mortgage balances rose 3.5% to nearly $9 trillion and represented the largest share of household debt. Home equity lines of credit fell 4.4% to $432 billion.
Credit card debt rose 5.7% to $829 billion. Auto loan debt increased 4% to $1.24 trillion. On a yearly basis, student loan debt edged up 4.5% to $1.4 trillion, but the proportion of student loan debt that became seriously delinquent declined in the second quarter.
“While overall delinquency rates have remained stable at relatively low levels, transition rates into delinquency have fallen noticeably for student debt over the past year, reflecting an improved labor market and increased participation in various income-driven repayment plans,” Wilbert van der Klaauw, senior vice president at the New York Fed, said in a press release.
The overall increase in household debt is not necessarily a warning sign in and of itself because it has also been accompanied by a rise in overall household wealth and a strong economy.
However, economists also caution against reading too much into the decline in student loan delinquencies, as about half of all student loan debt in the United States is in deferment or forbearance.
