The world of finance is notorious for its jargon – and sometimes, it can be hard to keep up even for those of us in the industry. Some terms, such as ‘gross charge-offs’ and ‘net charge-offs’ are often used interchangeably or even go unnoticed altogether. However, their impact on a lender’s bottom line is significant.
Before we get into it, let’s take a look at what these terms really mean. Gross charge-offs refer to the actual amount being written off by a lender, while net charge-offs account for any recoveries made on that debt subsequently through workouts, settlements or other arrangements.
We’re witnessing a concerning trend at this point in time, where gross charge-offs are on the rise, and net charge-offs are lagging behind. This difference is understandable given that it typically takes charge-offs 6 to 12 months to reach settlement or recovery. Besides, the steady uptick in 90-day delinquencies suggests that gross charge-offs will continue to rise. Therefore, every month sees new charge-offs while corresponding recoveries remain pending.
When exactly does a charge-off occur?
Very simply, a charge-off takes place when a borrower goes 180 days past a card account. This could happen due to any number of reasons – when the customer has fallen on hard times, if he or she just decides to stop paying, or when a delinquent customer who is still in debt makes a settlement attempt that can only be accepted post-charge off.
While you may not be able to do much in the first two situations, in the third scenario, your intervention as a lender can have a significant impact. You could facilitate a consultation between your customer and a credit advisor or counseling agency. This could open up options they may not have considered otherwise, and it empowers them to make informed decisions that could be beneficial to all parties involved.
The truth is, payments that are made through debt management programs may not be too different from those that are made through debt settlement programs, once you factor in the fees charged by debt settlement companies.
That being said, there are substantial upsides for borrowers who opt for debt management programs. Let’s take a look at what these advantages are:
Increases savings: When compared to debt settlement programs, debt management plans often result in a higher level of overall savings.
Prevents creditor suits: Enrolling in a debt management plan allows borrowers to avoid potential creditor lawsuits during the program.
Simplifies payments: With a debt management program, borrowers only have to make one simple payment every month that covers all their unsecured debts. It’s that easy!
Encourages prompt responses from lenders: Lenders usually respond positively to DMP enrollment within just 30 days.
The advantages for lenders are equally compelling. Here they are:
Maximum opportunities to avoid charge-offs: By offering credit counseling sessions, lenders increase the possibility of completely avoiding charge-off costs.
Reduction in collection costs: Efficient debt management minimizes the need for expensive and time-consuming collection efforts.
Retention of conscientious customers: When lenders support borrowers through financial hardship, they foster goodwill and loyalty.
Another major benefit of offering credit counseling sessions is the retention of communication rights with the borrower. Unlike debt settlement programs where borrowers may ask for a cease and desist with regard to communications, credit counseling allows lenders to maintain open correspondence with their borrowers so they can continue to provide them with effective guidance.
Do you want to give credit counseling a try? Well, it’s simpler than you might think! All you need to do is:
Choose a reputable credit counseling agency: Pick four well-known credit counseling agencies to refer your borrowers, or use a service like Peregrin to facilitate referrals.
Continue with collections processes: While your borrowers consult with credit counseling agencies, continue your collections process and make sure to maintain communication and regular follow-ups.
Explore partnership opportunities: Get in touch with credit counseling industry associations such as FCAA.org or NFCC.org to know more about collaboration opportunities and how they can benefit you. You could also work with Peregrin to effectively test referral programs and strategies to mitigate charge-offs.
In conclusion – bringing down net charge-offs is about a lot more than just minimizing losses. It’s about empowering borrowers and building financial security and stability. By embracing credit counseling agencies and partnerships, lenders can mitigate charge-offs while fostering stronger customer relationships. So, don’t wait any longer – take the first step towards a brighter financial future today and walk the path to long-term success!
