In a strange twist of logic, Creditrust Corp., a Baltimore-based acquirer of consumer receivables, has been persuading delinquent credit card holders to pay off their debts by offering them more credit.
Consumers have been responsive since the program's roll out in September. It's no wonder; consider the consumer debt crisis:
consumer debt now exceeds $1 trillion;
a staggering 1.4 million Americans filed for bankruptcy in last year;
credit card holders owe $360 billion-double the 1990 level.
But whether Creditrust's program will allow participants to crawl out of debt, as it's billed-or merely spiral anew into default-remains to be seen.
riding bad debt wave
Creditrust acquires and collects delinquent loans, mostly from charged- off Visa, MasterCard and private label credit cards.
Founded in 1991 by chairman and CEO Joseph Rensin, Creditrust Corp. is the oldest purchaser of charged-off credit in the nation, and the only public company that purchases bad credit as its primary business. So far, Creditrust has purchased more than one million delinquent credit accounts from dozens of banks and other credit card issuers.
Revenues for the company's third quarter increased 69 percent to $4.3 million, compared to $2.6 million for the same period last year. Year to date, revenue has increased 150 percent to $16.1 million, compared to $6.5 million for the same period last year.
The goal of the company is to reacquaint consumers who are overwhelmed with debt with the benefits of responsible credit management. Creditrust CFO Rick Palmer says, "We buy the accounts in bulk and turn them into securities that are rated AA by Standards & Poor's, keeping 100 percent of what we collect. Then we offer customers resistant to making payments additional credit to induce them to pay off their debts."
Under the program, certain customers can reestablish credit and create a more positive credit rating while paying off their existing credit card balances.
The company's portfolio analysis tool (PAT) helps the company value and price charged-off pools with a high degree of accuracy. Its proprietary software system, called "Mozart," manages the revenue on the company's $2 billion in charged-off debt.
The system contains information on the entire customer database and allows the company to make decisions on customer-payment plans, Palmer says.
Here's how the program works: The company strikes a deal with each customer that can involve anything from a one-time settlement to payment plans of up to 48 months.
But the customer must make at least a $200 down payment on outstanding debt for his entire debt balance to transfer to the new card. In return, the debtor obtains a $500 credit line on a private label credit card issued through a Creditrust bank affiliate with an initial interest rate of 9.9 percent.
An extremely important aspect of the program is that the debtor must agree to allow Creditrust to electronically deduct the monthly payments from his checking account.
Profits from Losses
A software system called QuickCheck processes a facsimile check through the customer's account. "The program accomplishes all of our debt recovery goals while creating virtually no balance sheet risk," says Palmer. "It requires minimal cash investment and delivers a steady stream of interest and electronic funds transfer fee income."
He says the cards with Creditrust's name on them attract brand loyalty, and customers continue to use them even after their debts are paid.
Turning bad credit into an asset is a growing phenomenon. Banks and other credit card issuers are turning non-performing debt into performing assets by participating in forward-flow contracts. In a forward flow contract, a bank contracts with a single buyer that agrees to buy the charged-off debt on a month-to-month basis at a set price.
Thus the bank is assured of a certain return on charged-off accounts that it can add to the asset side of its quarterly statements.
The bank also saves money in overhead and carrying costs. Purchasers of the charged-off debt turn a profit by collecting more money than they paid for the debt.
Palmer says Creditrust is a purchaser of charged-off debt, not a collection agency. "We buy accounts in large pools and then we securitize them," says Palmer. Creditrust then takes those products to market, selling them in the form of asset-backed bonds to major institutional investors such as pension funds and insurance companies.
Though Creditrust was one of the first firms to buy and securitize bad debt, other companies have joined the fray, including Consumer Financial Services and Koll-Dove Global Disposition Services.