Moving Up To the Top of the Pile

  Credit card issuers often come in third, fourth or even later when financially struggling consumers set their bill-payment priorities. How can issuers move up in the queue?
  It's getting hard to grab a piece of a shrinking pie. Consumers, hard-pressed by ongoing economic stresses, aren't necessarily paying back their debts in the same order that they used to. This emerging mindset is forcing credit card issuers to toss out some long-held assumptions about where they fall in the debt-repayment pecking order ... and to try to manage accounts more nimbly so that they can stay at least towards the top of the heap.
  "The old philosophy of house and then car (loans being repaid first) still holds," says Dina Anderson, director of modeling services in the analytical service group of Chicago-based credit-reporting agency TransUnion LLC. "But cards are getting talked into the mix depending on what their strategies are."
  For example, retail card issuers are becoming more aggressive in pursuing delinquent cardholders, according to Anderson.
  "Five or 10 years ago, people would pay their Citibank card before they paid their retail card," she says. "That's because retailers had virtually no collections strategies. Now ... folks are being hunted down by their retailers, and some of the retailers have better strategies than (bank card issuers). They're jumping the line on the major cards."
  TransUnion in mid March analyzed the age of various types of accounts for consumers who have mortgages, home-equity loans, installment loans, an auto loan, a bank card and at least one retail card, and who are delinquent on at least one of these accounts. The results: home-equity and mortgage payments were most current, followed by auto, installment loans, retail, and then bank cards.
  That's good news for retail card issuers but bad news for bank card issuers.
  Experienced collections managers say that they are encountering consumers who are simply trying to pay somebody each month. The relative value of each type of debt wavers in and out of focus as the consumer tries to spread the misery amongst all his creditors.
  "It's not as simple as a hierarchy of payments," says Anthony V. Marino, president and chief executive of Nationwide Credit Inc., a big third-party collections agency based in Kennesaw, Ga. He is newly arrived at NCI from Sears, Roebuck and Co., where he managed Sears' collections and customer-service operation since 1997. "The customers and debtors take the pool of available funds that they have in a given time frame-a week, a month, a quarter-and try to obtain utility from their credit lines."
  NCI, which collects for numerous bank card issuers, reports that some distressed consumers are starting to skip mortgage payments to knock off several card bills.
  "If they skip one mortgage payment ... that means that they could keep the utilities and revolving credit open and not be in danger of having their house repossessed because they're only one month behind in their mortgage," says Marino.
  Consumers nowadays aren't trying to duck any one payment, but rather, keep all their creditors equally unhappy.
  "It's not as simple as, 'every month I'll pay the mortgage and when I have extra funds I'll pay the card,'" explains Marino. "It's, 'how do I extend the life of the relationship I have with my creditors within my available funds?' But then things get out of control and start to fall apart on them."
  Other collections executives notice similar patterns.
  "We see a lot of robbing Peter to pay Paul. They'll let the house (payments) go for a month or two and catch up on their cards, and then they'll let their cards go for a month or two to catch up on the house," says Ken L. Manche, vice president overseeing collections for Irving, Texas-based First Horizon Home Loan Corp.
  His strategy: to try hard to get just-barely-past-due debtors to pay their mortgage quickly, before an aggressive card or auto lender siphons off that month's cash.
  People who have several types of credit cards don't seem to put much of a premium on bank cards any more, says Marianne Gray, chief operating officer of the Credit Counseling Network of Greater Fort Worth, Texas.
  "If they have some money, they'll either close out a lower-balance account or pay down a higher-interest account," she says. "They'll put a big chunk in one place, to see some progress."
  According to Gray, some debtors are abandoning an apparently hopeless effort to pay off their card debt by meeting the minimum payment each month. But the critical error that many debtors make is to assume that mortgage lenders have the same kind of flexibility in negotiating partial payments that other lenders might have. That's just not true, says Manche, because there's little wiggle room written into most mortgage contracts. Stringent requirements set by the secondary market prevent collectors from offering many options; they can't even accept partial payments.
  Not surprisingly, lenders who monitor high-risk accounts closely are constantly running credit checks and computer models to try to detect those who must be contacted immediately after a missed payment. Major card issuers are just beginning to look at how other types of debt impact a consumer's ability, or willingness, to move them to the head of the repayment line, says Trans Union's Anderson.
  "There's a lot of national benchmarking going on right now to see how they look compared to the general credit environment," she explains. "We're starting to hear questions like, 'my delinquency rate is X. What is the delinquency rate for the nation?' They are scanning across their portfolios for key indicators such as impending foreclosure, and looking for any delinquency outside their own category."
  As creditors across the board start crowding into the first 30-days-past-due calling period, only those with winning strategies will be able to make a convincing case that their payments should be made in lieu of others.
  Deborah L. McNaughton is a creditor's nightmare. Author of "The Get Out of Debt Kit," published by Dearborn in 2002, she earned her credentials from the school of hard knocks.
  After a series of business failures and medical emergencies, the McNaughtons were drowning in $300,000 of debt. McNaughton quickly developed some hardball negotiating tactics when she faced an onslaught of collections calls.
  "When I'd get a small percentage of a payment, I'd contact the creditor on the 28th of the month and I'd say, 'I can give you this cash by the 30th, but I need a letter saying that this will settle it in full,'" she says. "Nine times out of ten, it worked."
  Now a credit counselor, McNaughton urges card issuers to acknowledge a family's essential requirements for a house and transportation.
  "Work with that, because you don't want to get into an all-or-nothing," she advises. "If you're starving and getting badgered and you say, 'If this was your family, would you give them food or pay the bill?' Well, no collector can answer that."
  One non-profit credit-counseling agency is piloting a program that switches calls from people who are clearly in big trouble directly from the creditor's phone line to the agency's.
  "The industry trend is that the creditors are looking much more at the overall picture of the debtors," says James E. Tisdale, director of business development for Fort Lauderdale, Fla.-based Consolidated Credit Counseling Services Inc. "They are trying to identify the candidates who have much more benefit from working with a counseling agency."
  Consolidated Credit Counseling has arranged for its own debt counselors to take calls seamlessly forwarded from several card issuers. The counselor clearly identifies her affiliation with Consolidated Credit Counseling, but also takes the tactic that the debtor needs to work out a way to repay all of his outstanding accounts.
  Tisdale says that callers thus switched are much more willing to tackle their problems than those who come in after much hemming and hawing.
  "When the creditor and the debtor are on the phone looking through the person's file and (it's clear that) they're having difficulty with more than just one card, that's an opportunity to discuss the entire financial situation," he says.
  The key to extracting payment from people who are trying to decide who to placate this month is to emphasize the consequences of skipping the payment altogether, adds George E. Aird, who has a decade's worth of card experience and is now a group leader in the collections department of Fidelity National Bank in Atlanta.
  "If the credit history for a card customer is poor, I get very nervous," he says. "I assume that I'm the only one who will get money. That's what pushes me towards a solution."
  Because a card collector has no idea where that card fits into the debtor's current set of financial priorities, he needs to first gently probe to find out what circumstances pushed the debtor into delinquency to begin with.
  "You agree with them-they need to hold onto their house. If they have a sick child, that's more important to them than paying the card," says Aird. "I'm going to empathize with them. We can find a way to meet ourselves halfway. I'm the one who knows what to do. I have to let the customer know that I'm there to help."
  With the old assumptions about the order of repayment priorities no loznger so useful, a little enlightened self interest by one creditor might lead to more repayments for all of a strapped consumer's lenders.