Vision Credit Education, Inc.

If you thought you were feeling the pinch from the recession, consider what is happening to collection agencies. Their collection rates are dropping as their clients experience extended financial turmoil. Even their financing options for buying up new debt are drying up. The result is that the prices that credit card companies receive for charged off debt are plummeting.

In 2007, credit card portfolios were selling for a 10-year high of 14 cents. According to Collections and Credit Risk Magazine, these prices have dropped to as low as 4-7 cents on the dollar. These are the reasons behind the drop.

Collection Rates Plummeting

With unemployment rates exceeding 10% in many areas, vast numbers of cardholders are unable to manage their debts. Whatever money they do bring in from unemployment or from their spouse usually goes toward necessities such as food, utilities and transportation.

Some are facing foreclosure or eviction from an apartment. The result is that unsecured credit card debts are among the last bills to be paid. For collection agencies trying to collect on this debt, they really are scraping the bottom of the barrel.

Financing Options Drying Up

Collection agencies often depend on financing in order to make large portfolio purchases. The tightening credit markets make such financing more difficult. Few debt collectors have the assets necessary to fund the purchase of large portfolios without benefiting from outside financing.

Fewer financing options means that the market for charged off debt has fewer buyers. As a result, prices have dropped by more than half.

Consumers Will Not Benefit

It goes to reason that debt settlement companies may try to exploit these lower numbers to promise lower payoffs. However, there is no evidence that debt collectors are lowering their settlement offers.

The trend has actually been the reverse, with many debt collectors requiring much higher payoffs than they did just a few years ago. Offers of 30% payoffs have almost disappeared. Most payoff offers are over 60% of the balance.

Consumers should understand that the lower acquisition costs for defaulted debt are offset by lower collection rates. In other words, their costs are coming down at about the same rate as their revenues. Don’t expect them to pass on any savings because there aren’t any!