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Credit Card Debt Collection

Thursday, August 23, 2007

Have you ever wondered what happens to people who fail to repay their credit card debt? Or, better yet, what happens to the institution that has issued the card and is now unable to collect payments. Things aren't as simple as they may seem. Credit card debt collection is a $66 billion industry in the USA. Moreover, there are 8 million customers who had a chance to experience what it's like to be targeted by debt collection agencies.

Many experts criticize the debt collection system in America. With the lack of strict and effective regulations to control the process, many debt holders find themselves harassed, sued and threatened. Moreover, a lot of people get mistakenly contacted by collection agencies.

First of all, let's elaborate on the industry itself. There are two schemes that collection agencies may use in their operations. First scheme involves debt collectors receiving a certain portion of the debt that they have managed to return to the credit card companies. Second scheme is based on debt collection agencies buying the title of the credit (together with borrower's details) from the creditor for a certain sum.

One of the main reasons why creditors outsource debt collection process to other companies is the lack of resources or time. Debt collection process requires special approach and credit issuers find it costly to run such practice. Therefore, to minimize the losses on uncollected payments, financial institutions sell the debt to other companies or hire agencies to help them collect the payments.

There are also some debt collection agencies that prefer buying huge debt portfolios and then distributing them among smaller agencies. The smaller ones have a choice of either reselling the debts to even smaller companies or start contacting borrowers to collect payments.

However, problems start with banks and credit issuers supplying only minimal information to collection agencies. This negatively affects debt holders, since they end up being unaware of any legal actions taken against them by debt collectors due to a change in address. Moreover, the system may also cause wrong people being contacted by the agencies.

Of course, extra information can be sold for extra cost. But this practice only results in debts being charged with interest. And even if you end up paying off your past-due debt, there is a chance that you won't be able to prove it or the agency that has collected the payment may not provide evidence to credit bureaus.

And it's not just the customers that suffer. The collectors often have little data to back-up their claims for debts. Due to lack of definitive set of rules on collecting process, agencies get sued by the credit holders for unfair practice.

But things get better as time passes.  The Fair Debt Collection Act has been introduced in 1977 that now protects consumers from abusive practice of collection agencies.  Certain states have also introduced more extensive regulations to govern the process. In general, credit cards are becoming more and more regulated.

So, next time you hear about a bank failing to collect payments from its clients, that doesn't really mean it is making huge losses. In fact, since you are morally and legally obliged to repay your owing, you are the only one who will be making losses. Think twice before applying for credit card deals and making purchases that you have no power to pay for.
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