[Video] Unlocking a Consumer's True Capacity to Pay

Did you know that a consumer’s credit score isn’t the most indicative measure of their capacity to pay? Credit scores lag, they don’t provide a full picture, and they can’t be monitored daily. By focusing on capacity to pay instead of a credit score, many in the collections industry are seeing an uptick in their paying accounts. But what is capacity to pay, and why does it matter?

Consumers often show an improved capacity to pay before their traditional credit scores fully recover. Capacity to pay considers certain events in a consumer's financial life and how those events can impact repayment. By studying consumer behavior and the correlation between certain events and repayment of accounts, triggers have been identified that indicate timely contact with a consumer which can convert a warehoused or stale account into a performing account. 

Listen to our Executive Q&A with Experian’s Matt Baltzer, or read below to learn about capacity to pay, why it matters, and how your organization can unlock its potential. 

Missy Meggison: 

Hi, everyone! We're here today with another episode of Executive Q&A. I'm Missy Meggison, editor of insideARM, brought to you by Auriemma Roundtables, and I'm joined today by Matt Baltzer, Senior Director of Product Management at Experian. Matt, can you give us a quick introduction?

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Matt Baltzer: 

Hi, Missy, it's great to be here. So I'm Matt and I'm one of the product leaders at Experian’s consumer information business, and one of the areas I focus on for solutions is to help debt collectors manage accounts.

[Missy]: 

Wonderful thanks for joining me today. Let's talk about capacity to pay. In your experience, what does capacity to pay mean, and how does it differ from a credit score?

[Matt]: 

That's a good question. Most consumers fully intend to satisfy a loan when it's originated, but somewhere along the way something changes in their finances or life circumstances that forces difficult choices about payments. Fortunately, consumers typically find their financial footing, and as they do, they'll start to show signs of an improved capacity to pay often before their traditional credit scores fully recover.

[Missy]: 

So let's talk about that a little bit. What type of events may indicate that a consumer has an improved capacity to pay? What should debt collectors be looking for?

[Matt]:

The most telling events are actually when consumers begin to settle or pay off accounts that have been placed in collections. They may also bring current accounts that were previously delinquent. These are signs that the consumer may be in an improved financial situation, and that they're taking an active interest in rebuilding their credit standing. Debt collectors should be looking for these signs because they may indicate an increased capacity and willingness to pay or settle your account next.

[Missy]: 

So let's dig into that a little bit. How do you know these events lead to an improved capacity to pay?

[Matt]:

We've long known this from working directly with clients that use these positive improvement triggers as a signal to re-engage consumers who may have been falling behind on payments. But recently, we conducted a study to see how much in which events are most predictive. This demonstrated that a charged-off account for a consumer with a positive improvement or new trade event was more than 30% more likely to receive payment in the subsequent 90 days. And this was absent a direct intervention, meaning collectors probably were not acting on most of these signals. For some of these triggers, the improvement was as dramatic as 250%**.

[Missy]: 

Wow! That's a significant number. And speaking of signals, how important is it for a debt collector to act quickly when there's been an improvement in capacity to pay?

[Matt]:

For older or warehoused accounts, debt collectors are typically not actively engaging them or obtaining refreshed credit data. Even a quarterly refresh may miss a key moment when a consumer is actively repaying prior financial obligations. If a consumer hasn't recently been contacted about an account that's in collection, it may not be top of mind. So, it's very important to leverage a solution that can enable you to act within days of consumers illustrating and improve capacity to pay.

[Missy]: 

So, what kinds of benefits and improvements have you seen from companies that have been effectively managing and monitoring capacity to pay?

[Matt]:

Companies that effectively manage and monitor capacity to pay can identify older inventory that would normally have a very low yield and reinsert some of those accounts into their outreach strategies. This approach can help companies improve their bottom line while putting consumers on a path to improve their credit history and overall financial health.

[Missy]: 

Well, that sounds like it could be a big undertaking. How have you seen debt collectors effectively implement a successful “capacity to pay” monitoring program?

[Matt]: 

It could be a big undertaking, but a solution like Experian’s Collection Triggers℠ is quite easy to start out with. Our team can work with debt collectors to select the handful of events to start, and you can easily manage your spend and workload to ensure you'll see real benefit before ramping up. I've seen the entire process from contracting to receiving triggers take as little as just a few weeks.

[Missy]:  

Well, I certainly learned a lot there. Thank you so much, Matt, for answering all of my questions. I'll turn it over to you for the closing and final thoughts for the audience.

[Matt]:

Thanks, Missy for the opportunity to talk with your audience. I'd invite anyone that's interested in learning more to check out the links in this posting or contact us with questions. We're here to help.

[Missy]: 

Wonderful. Thank you again so much for your time today, and thanks to everyone for turning into this episode of Executive Q&A. We'll see you the next time.

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Learn more about Experian's Collections Triggers here. 

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** Experian analysis of Trades that were charged off as of January 2023 using April 2023 Trigger file to capture Triggers in the last 90 days