Do Forbearance Plans Help Mitigate Credit Card Losses?
22 Pages Posted: 8 Jul 2005 Last revised: 17 Jan 2008
In this paper, we examine how reinstated (i.e., re-aged) credit card accounts are likely to default again. Our sample data reveal that about 22% of the re-aged accounts default again, mostly in the first 24 months after reinstatement. We also find that a FICO score (public information) is a better predictor of a second default, while a payment behavioral score (private information) is a better predictor of a first default. Furthermore, the average FICO score of the 78% of the re-aged borrowers who did not default again rises about 20 points, an improvement in their relative risk profile overall. These findings suggest that the re-aging program provides a second chance for liquidity-constrained borrowers who would have otherwise defaulted on their debt.
Keywords: Credit card default, forbearance, loss mitigation, hazard models
JEL Classification: G21, C41
Suggested Citation: Suggested Citation