Why Debt Collection?
Remynt is empowering consumers to rebuild credit while resolving debt, looking to reshape the debt collection industry to make it customer-centric and focused on credit recovery.
To understand where we are today, it’s important to understand the historical context of debt collection and credit scoring and their impact on consumer financial health.
Debt collection has been controversial throughout history and is a challenging (and often despised) industry. While in ancient times, once you repaid a debt, you were free to rebuild your life, in today’s world, debt has a seven-year tail of reputational damage on a credit report that manifests in a credit score.
Debt Collection Origins
In ancient civilizations like Mesopotamia, debt collection was recorded through contracts and agreements dating back to 2000 BC. Debts were considered legal obligations, and creditors would hire debt collectors to recover the amounts owed. These collectors were sometimes granted the authority to use physical force against debtors. Ancient Rome had a similar approach, allowing creditors to claim their debtors’ assets, including personal freedom, as collateral. In medieval Europe, the role of debt collection was carried out by bailiffs appointed by courts to seize property or imprison debtors who could not pay their debts.
The influence of debt collection can even be found in religious texts. People who had become enslaved due to their inability to repay debt and the encouragement of debt forgiveness after seven years can be seen in the Bible.
Over time, debt collection practices have become more regulated and formalized. Modern debt collection agencies emerged, bringing a more structured approach to the industry. However, despite these developments, debt collection remains controversial due to the aggressive tactics (such as persistent phone calls) and litigation strategies some agencies employ.
Credit Reporting
Alongside debt collection, the concept of credit reporting and scoring has also evolved. The 1800s saw the establishment of credit bureaus in the United States, which collected information on consumers’ credit histories to provide lenders with valuable insights. As technology advanced, credit scoring became more widespread. In the 1950s, automated credit scoring was introduced. In 1989, the FICO score, developed by the Fair Isaac Corporation, was launched, becoming one of the most widely used credit scoring models today.
In 1970 Congress passed the Fair Credit Reporting Act (FCRA) to protect consumers and regulate the use of credit information. The FCRA set guidelines for collecting, disseminating, and using consumer credit information. One significant provision within the FCRA is that negative information, such as late payments or collections, can only remain on a consumer’s credit report for seven years. This provision ensures that consumers do not face indefinite repercussions for past financial mistakes. However, it is worth noting that exceptions exist, such as bankruptcies or government debts, which may remain on a credit report for up to ten years.
Credit Scoring, Credit Factors & Charged-off Debt
Credit scores have become a vital factor for lenders in assessing a person’s creditworthiness and determining whether to approve a loan or credit application and what interest rates will be offered. The most used credit scoring models are the FICO and VantageScore. These scores are built on a person’s credit usage and repayment history, with credit cards playing a significant role in shaping one’s credit score.
There are five factors of credit scores: with payment history and utilization being the highest. Length of credit history is important as well. Using credit responsibly, maintaining a low credit utilization rate (below 30% of available credit limits), and having a diverse mix of credit types are all factors that positively impact credit scores. Not all debt is detrimental to credit scores; certain types, such as student loans or home loans, are considered “good” debt as they contribute to a person’s overall financial health.
Unpaid debts that go into collections have a detrimental effect on credit scores. The length of delinquency and the progression into debt collection can cause a significant decline in credit scores. And when a consumer goes delinquent on one account, their other creditors tend to notice. They will either lower their credit limit or close the account altogether, further devastating their credit score and financial health.
In 2022, $22 billion of credit card debt was charged off in the United States. When a credit account is charged-off, meaning the creditor has given up on collecting the debt, it becomes a severe red mark on a credit report. Paying on a charged-off debt will not rebuild a person’s payment history since the account has been closed, although the debt is still owed. Some debt collectors choose to report the charged-off debt they acquire, further impacting a person’s credit.
The consequences of unpaid debts extend beyond credit scores, often resulting in significant financial hardships. Debt collection agencies can employ aggressive tactics to pursue payment, resorting to legal action to secure wage garnishment and property liens. These actions can have long-lasting negative effects on an individual’s financial well-being, making it challenging to recover from the debt.
Debt Collection and Credit Markets
Credit markets become tighter when delinquencies increase, particularly for consumers with subprime credit scores (under 660). Interest rates rise for everyone, but those with fair to bad credit are particularly impacted.
It may be hard to argue that debt purchased for pennies on the dollar sold and sometimes resold provides value to anyone other than those collecting it. It’s a very profitable industry for those who buy and collect debt since the debt is secured for a deep discount; recoveries don’t need to be anywhere close to 100% for there to be a good profit. When banks charge off debt, they take it as a business loss for tax purposes, so debt sales are not about recovering their losses.
Because of the impact of delinquencies on the credit markets, it’s logical to have a backstop that makes people feel compelled to pay their debts, particularly unsecured credit card debt. While it’s true that there must be a consequence to someone going wild at the Gucci store and walking away, otherwise, it’s akin to stealing. That consumer will be punished with a depressed credit score, compromising their ability to get credit. They will pay dearly when offered credit as interest rates, and in some states, insurance rates are based on credit scores. The reality of deep delinquency has less to do with consumers who went crazy at Gucci and more with people leaning on their credit cards to live, experiencing a major life event compromising their income, or having poor financial literacy and habits.
The Problem with the Debt Collection Process
Debt collectors don’t make it easy for consumers to repay their debt. While consumers overwhelmingly have indicated they don’t want debt collection phone calls and letters, it’s still the primary outreach method the industry employs. Many debt collectors have online payment portals but don’t widely advertise them and use Web 1.0 technology. These portals offer limited repayment options, requiring consumers to speak to a collector. Perhaps this is intentional since individual debt collectors are commissioned-based, the industry has high turnover, and commissions are important for retention. Consumers in debt want to avoid the pressure tactics used as they add additional strains to consumers’ current struggles with navigating living expenses and debt payments. Many consumers with charged-off debt typically have more than one debt in arrears and are going through financial hardship (or trying to recover from one).
ACH bank payments are the primary mode of payment, and these companies are not utilizing bank account connectors such as Plaid, Yodlee, or MX; consumers must provide checking account information and sometimes an actual check number. A recent survey found that 45% of Americans didn’t write a check last year, and the numbers are even higher among those under 54. In fairness, most credit card companies don’t allow debt collectors to use their payment rails for debt repayment, as it’s not ideal to have people repay debt with debt.
Debt Repayment Conundrum
Recovering from delinquency and rebuilding credit requires more than simply repaying debts. Creating a positive payment history is crucial, and this can only be achieved by using credit products responsibly. Individuals with charged-off debt need help accessing credit because, at best, they only qualify for subprime loans or credit cards with high-interest rates, low credit limits, and additional fees. These predatory products often perpetuate the cycle of poor credit. For example, a credit card with a $300 credit limit can easily reach a high utilization rate, particularly when the card comes with an annual fee and set-up fee upon activation, ultimately affecting the consumer’s credit score.
There are secured credit cards, which require a deposit. And there are credit builder products, most of which have a cost and only provide an incremental boost. Some consumers rebuild their credit by becoming an authorized user on someone else’s account or getting a cosigner for loan products, but you shouldn’t have to rely on someone else to help you build your credit.
Innovation and Debt Collection, Oxymoron
Debt collection has been a last mover in terms of innovation. There are nearly 7,000 debt collection agencies in the United States. Most are small, with 20 or fewer employees. The greatest profit in the industry goes to debt buyers, who also collect on the debt they buy. These debt buyers/collectors leverage AI and analytics, but it’s mostly used to determine who can afford to pay to sue them. Debt lawsuits represent 25% of cases in civil courts, with the numbers being higher in some jurisdictions. Most agencies collect debt on behalf of creditors or debt buyers, so they get a fraction of what they collect.
Technology infrastructure is minimal for many, so payment portals are marginal, and ACH bank payments rule the day. Digital collection software products are largely CRM systems for commissioned collectors, providing employees access to sensitive personal information. This creates work environments that are highly surveilled, as data often gets breached.
Call centers are the industry’s leading collection tactic, making payroll a significant portion of operational expenses. Marketing tools are non-existent, and digital tools like text messaging and emails are timid. Some of the hesitancy is due to the patchwork of regulatory mandates on debt collectors. But the irony is that digital tools and automation can make compliance easier.
Debt collection is a consumer-facing industry, but the customer isn’t the person they’re collecting from. This paradox is why there’s little investment in the customer experience. In 2021, the Congressional Research Service released a report, The Debt Collection Market and Selected Policy Issues, which highlights this issue:
“Consumers cannot choose the debt collector with whom they engage and cannot take their business elsewhere if abuses occur. In this way, the debt collection market does not provide an economic incentive to provide good service to consumers, as in other consumer markets.”
Credit Recovery
There is no such thing as credit recovery. There is credit repair, a $4.5 billion industry where consumers pay more than $100 monthly to an organization to dispute items on their credit reports that are often accurate. There are credit-building products, but most aren’t true lending products, so they diminutively impact credit scores. This is not to say they’re not worthwhile.
Consumers with charged-off debt need to resolve debt and rebuild credit, and that’s exactly what Remynt is all about. Remynt buys portfolios of charged-off consumer credit card debt, allowing those consumers to rebuild and earn new credit, a savings account, financial management tools, a community, and rewards for repayment. Our approach is providing the necessary support to improve financial literacy and health. The Remynt credit card offers a vehicle for consumers to rebuild credit in the repayment process while working toward having available credit when they fully repay their debt. Providing a savings account and cash-back rewards for repaying debt is game-changing for a consumer climbing out of debt. Those struggling with debt need free credit score access with insights into improvement methods and financial management tools to set goals and alerts and make budgets and debt repayment plans. And given the shame attached to debt, many want a community of support, offering camaraderie and an opportunity to learn from experts and peers in a judgment-free environment. This does not exist — at least not in the debt-collection world. Consumers are typically left to struggle alone or anonymously on online forums.
Remynt invokes the opposite of high-pressure tactics in resolving debt. We’ve created a personalized self-serve approach, enabling consumers to go online and resolve their debt on their terms, setting payment plans, amounts, frequency, and types (including CashApp, Venmo, PayPal, and debit cards). We provide a transparent way for consumers to dispute their debt, indicate hardship, and make payments. Remynt uses modern marketing tactics, retargeting ads on the web and social, emails, webhooks, web and in-application push notifications, and SMS texting instead of dreaded phone calls and wasting paper. And since trust is essential in handling consumer data, Remynt uses a data privacy vault, so only tokenized information flows through our systems — sensitive personal data is not visible.
We’re creating lifetime customer value, giving distressed consumers a second chance, and providing the tools and support they need to grow with us over time. Our success is seeing credit scores soar, financial health improve, and being a part of our customers’ life journey as their credit needs change over time. It’s our goal to enable millions of consumers to #getremynted to a better financial future and make “credit recovery” a reality.
