Credit Card Numbers;
Posted by
Loyola
Dec 2 '09, 15:43
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"You work at a collections agency. Someone calls you with $2,000 in credit card debt; they are paying 30% interest from missing a payment, and they are having trouble making the minimum 3% payment, and are racking up a $50 late fee every other month. You are confident that they will default in X months, and not pay a penny of the remaining balance. You could give them a Fix Pay loan (Loan to modify their terms so that they avoid bankruptcy), which would be a 6% annual interest, no more fees, that they would pay off over 4 years with 100% certainty.
At what X, if it exists, is it more profitable to deny them the Fix Pay loan? And what is the remaining balance on the credit card? Here�s a quick google spreadsheet exercise, which shows (with an appropriate 3% cost of capital, or discount rate, as indicated in credit card literature), that in this example X is 24 months, with $1,205 on the balance. To make that clear, rather than having the consumer pay off the full loan over 4 years with 100% certainty at 6% and no fees, it�s more profitable to charge 30% interest and fees for 2 years and then simply forget about the $1,250 that is still on the balance when the consumer finally goes under. Anything more you could get out of them, in court or with a few more minimum payments, is gravy."
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