Evolving U.S consumer debt trends demands a fresh collections strategy

Hans Zachar, Group Chief Information Officer at Nutun

After a prolonged phase of elevated interest rates, U.S. consumers have experienced the impact of inflation and higher borrowing costs. As a result, many have resorted to both secured and unsecured credit to cope with the surging costs of living. Nevertheless, in spite of the financial strain, consumer spending has continued to rise, largely fueled by unprecedented amounts of credit card debt.

The current landscape of U.S. consumer spending

The U.S. Commerce Department’s Bureau of Economic Analysis (BEA), reported that consumer spending increased 3.7% in the third quarter (Q3) of 2024, marking the highest increase since early 2023. This growth can be attributed to higher incomes, the Federal Reserve’s loosening of monetary policy, and improved consumer confidence following the recent election results. Alongside this uptick in spending, there’s also been a rise in consumer credit, as individuals sought unsecured loans to navigate financial challenges.

According to a Federal Reserve Board report, consumer credit rose at a seasonally adjusted annual rate of 3.2%, with revolving credit increasing at a rate of 2.8% while non-revolving credit increased 3.4%. These increases pushed US consumer debt to an estimated $17.943 trillion, with consumer credit card debt rising $24 billion in Q3 2024, 8.1% higher than 2023, to reach a record $1.166 trillion. While consumers mainly focused on essentials in the first half of 2024, particularly among lower-income households, discretionary spending has been growing.

This rise in credit card debt means delinquencies have also increased marginally, continuing a trend that spans the last eight to 11 quarters, according to the Federal Reserve Bank of New York’s Equifax Consumer Credit Panel report. The report states that although widespread, the increase is more notable in the poorest ZIP codes, where delinquency grew from 11% in the second quarter of 2021 to 17.4% in the first quarter of 2024, which equates to 58% in relative terms.

While there is only a marginal deterioration in creditworthiness, with consumers generally able to pay a large portion of their debts, the challenge credit providers face is ensuring they are at the top of the list in the payment hierarchy.

The transformation of debt collection

For collection agents, focusing on early-stage collections between 0-90 days typically yields the best results, as consumers are strained but not underwater. In this regard, contacting consumers is often the biggest challenge for collection agents, primarily due to a historical reliance on voice calls. Understanding the different engagement preferences among the different consumer segments increases success rates.

Engagement channel preferences vary among generations, with the emerging credit-active consumer segment of Gen-Zeers and Millennials less likely to take phone calls compared to Gen-Xers and Baby Boomers, yet the U.S. sector still relies predominantly on outbound voice channels and letters to drive inbound contacts for debt collections.

This propensity for call avoidance means multi-channel capabilities are becoming more important, with data accuracy and analytics critical components to understanding consumer communication preferences. 

Another key consideration is the economic viability of the collection channel, with web or digital channels offering ideal failovers in instances where calling fails to connect with a debtor. These channels are also better suited to the higher volume, lower quantum collections in the low-income segment.

Faced with these market realities, creditors and their collection agents need omnichannel capabilities and data analytics capabilities to implement multi-channel pathways to boost resolution rates. However, many collectors do not have the capital to invest in technology, with a large portion of spend allocated to regulatory compliance in this highly regulated industry. As such, outsourcing is becoming a primary strategy to mitigate the costs associated with building these capabilities in-house.

Advantages of outsourcing debt collection

Outsourcing can significantly accelerate a collection agency’s digital transformation, enabling the necessary advancements to enhance debt collection effectiveness, especially in light of increasingly strict regulations. For example, the Consumer Financial Protection Bureau’s implementation of Regulation F now restricts collection agencies to seven contact attempts within a seven-day period. These regulatory changes have made traditional debt collection methods, which rely on dialers to maximize outreach, outdated.

Every attempt to contact a customer must be strategic, in order to maximize the chances of a response at every interaction. This necessitates collaboration with the right partners who can implement a multi-channel approach. The effectiveness of this strategy hinges on the ability to segment accounts and analyze customer data to create propensity scoring, while also standardizing engagements on a large scale.

By utilizing data analytics to assess consumer information, past interactions, and identified preferences, collection agencies can establish targeted collection strategies and ensure precision in their outreach. Additionally, evaluating campaign data across both voice and digital platforms allows agents to pinpoint a consumer’s position within the credit cycle, providing context that can enhance the conversation or suggest the most suitable channel—whether it be an AI-enabled chatbot or an AI-assisted live agent—to improve collection results across different consumer segments.