The Evolution of the Credit Department: Part 3

Hi,
In the last two blogs I have discussed how many credit departments have adopted a generic approach in how they decide to extend credit. I have also discussed the pressure sales people exert on credit departments to approve their credit requests. Now I want to examine some of the other pitfalls in eliminating the hands-on approach in extending credit:
1) Validating information on a credit application is more accurately done by people than machines.
2) Human involvement can identify when past credit problems should not interfere with current credit decisions. A common example of this situation is when a couple is divorced and the responsibility for financial obligations was put on the back burner during the divorce process, but both people became good credit risks after the divorce.
3) Another common occurrence is that when credit applications are rejected due to erroneous credit information on the individual's credit report. Human reviews can catch and rectify that situation more efficiently than machines.
4) Human involvement allows loan structures to be modified to suit individual credit needs that machines are not programmed to recognize. The best example of this is farming operations and their unusual income streams.
Credit departments have transformed from experienced credit professionals familiar with their particular credit fields, to computerized departments staffed by customer service reps. This change has resulted in an increase in sales and overall profits for companies. But the change also brought an increase in the cost of collections due to inferior credit. This cost has been passed on to the consumer in higher interest rates, finance charges and late fees. Tomorrow I will begin to talk about collection departments, and the people responsible for cleaning up some of the problems created by the generic approach to credit extension.
Until then,
Alan

The Evolution of the Credit Department

Hi,
Credit departments have changed dramatically over the last thirty five years. In the past, credit department employees checked and assessed all aspects of credit requests and dealt with each request on an individual basis. The result of this hands on approach was that credit was only extended to people who could genuinely afford it. As a result, the number of delinquencies, charge-offs and repossessions was very low. Due to the human verification process, it was rare that information on credit applications was falsified. Computer technology redefined how credit departments work and how credit is granted. By using computers to compile statistical data, creditors have established various formulas with which to generically grant credit. These actions have caused a multitude of problems in the credit field. It has allowed unscrupulous borrowers to obtain credit that they can ill afford and in some cases, have no intention to repay. One of the other negative effects of this generic approach to credit is that many times people unknowingly obtain more credit than they can afford to repay, and which in some instances results in financial chaos. To cover the cost of these indiscretions, the credit industry has used higher interests, finance charges, late fees, etc., Tomorrow I will talk about various structures of credit departments.
Until then,
Alan

The Never Decreasing Balances

Hi,
Now let's look at those bills that never seem to go down. Generally these balances are comprised of unexpected expenses which occur for all of us. Because these balances are unexpected, and not part of our monthly budget, we rationalize that it's ok not to pay them off as they occur. Or, we simply might not have the financial resources to do it. Your credit card company sets up your statement to specifically take advantage of this situation with the infamous "minimum payment due" option. When people make a minimum payment, they feel that they have made their monthly credit card payment. However, in many cases, making a minimum payment means that only the interest on the balance has been paid. Many times a person will pay the minimum payment for twelve months and be surprised that their balance has not decreased at all over the year. The only way to move this situation in a positive direction is to call the credit card company to ask them to work with you in finding a solution. Depending upon your situation, the credit card company might be able to reduce your interest rate, freeze your interest rate, and in some cases, reduce your balance. Tomorrow we will talk about stretching your bill paying dollar.
Until then,
Alan