All posts tagged debt

Because, trust me, it’s really not worth it to pay me later, at least as far as your credit score is concerned.

The personal finance management service Mint.com posted a very interesting study estimating the impact paying off four different financial obligations would have on a consumer’s FICO credit score. Starting with a below average score of 630, FICO’s own scoring tool projected the following:

A) Paying off a $250,000 mortgage would raise the consumer’s score from 630 to 635.

B) Paying off a $35,000 auto loan would also push the score up to 635.

C) Paying off a $5,000 credit card gets a much bigger bump, from 630 to 665.

D) Paying off a $1,000 bad debt in collections would actually lower the score from 630 to 595.

Bottom line: once you are in collections, it’s too late to avoid a hit to your credit score and paying off the bad debt can actually hurt. So the lesson for the consumer is to keep your accounts up to date.

But what’s the lesson for the creditor?

Creditors should educate their customers on the importance of on-time payment.

The education should start with the opening of the account, or shortly thereafter with a Welcome Call before the first bill is due. This is an opportunity to clearly communicate the account’s payment terms and the creditor’s credit reporting policy.  Options for enrolling in e-billing and automatic debit should also be presented, both of which are proven strategies for reducing delinquencies while lowering creditor costs.

If an account does go past due, the customer needs to know they are putting their credit score at risk before their account is reported as past due.  And to offer a little carrot along with that stick, they also need to be told that promptly curing the delinquency can help them maintain their credit standing.

However, if you are not reporting active account status to one or more of the major credit bureaus, then you can’t leverage this tool for driving customers to do what’s best for them and most profitable for you. Consider adding full file credit reporting to your customer management strategies. If you do so, you are likely to see a reduction in delinquency and bad debt as was the case for Nicor Gas when they began full file reporting in 1998. You can get the full story, along with similar experiences at DTE and Verizon in this compelling report by the Political & Economic Research Council.

Closing Thoughts

Varolii has over ten years of experience helping our creditor clients deliver information to their customers in ways that drive them to take profitable action. Our Message Masters design digital communications using voice, SMS and email channels that educate and persuade customers in a manner consistent with our client’s policies. But if credit reporting is not one of those policies, it can’t be used as an inducement to shape customer behavior.

And as illustrated in Mint.com’s credit scoring experiment, in that case, everybody pays more than they should.