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35 Percent of Adults have Debt in Collections; Arkansas CU Exec Looks at Overall Picture to Determine Credit Risk
Wednesday, July 30, 2014 6:35 AM

Thirty-five percent of adults have a debt in collections reported in their credit files, an Urban Institute study shows. The study, conducted with Encore Capital Group's Consumer Credit Research Institute, found these 77 million Americans owed an average of $5,200 in September 2013.

Nevada, hit hard by the housing crisis, tops the list of states: 47 percent of people with a credit file have reported debt in collections. The state also has the highest average collections debt, $7,198.

Twelve other states (11 in the South) and the District of Columbia top 40 percent: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, New Mexico, North Carolina, South Carolina, Texas, and West Virginia. On the low end, the Midwest's Minnesota, North Dakota, and South Dakota have about 20 percent of residents with reported debt in collections.

Donna Thomason, CEO of Arkansas Health Center FCU, isn’t surprised by Arkansas’ ranking.

“Our credit union serves a low-income demographic, so we are used to seeing debt in collections on our members’ credit reports; although most tend to be medical collections,” she tells the Leaguer.

Thomason goes on to say that the credit union will not automatically deny a loan request because of what’s on their credit report. Additionally, if there is a way – and if it makes sense - to restructure debt for a member, Thomason says they’ll do it.

“We look at the overall picture, and if there is a way to help our members, we’re going to do it,” Thomason notes. “We offer one-on-one counseling with members. We talk about the importance of paying bills on time, and explain how their score is impacting their ability to get a loan. We also offer suggestions on how they can improve their credit risk.”

Debt in collections involves a nonmortgage bill—such as a credit card balance, child support obligation, medical or utility bill, parking ticket, or membership fee—that has been reported so far past due that the account has been closed and placed in collections, often with a third-party debt collection agency. This debt can remain in a person's credit file for seven years. Some consumers become aware of collections debt only when they review their credit report.

Of the 100 largest metropolitan areas, five have at least 45 percent of people with collections debt: McAllen, Texas (51.7 percent); Las Vegas, Nevada (49.2 percent); Lakeland, Florida (47.3 percent); Columbia, South Carolina (45.2 percent); and Jacksonville, Florida (45.0 percent).

Some 5.3 percent of people with a credit file (roughly 10 million adults) are at least 30 days late on a credit card, auto loan, student loan, or other nonmortgage payment. The average amount needed to pay to become current on that debt is $2,258.

Debt past due is most pronounced in the South, led by Louisiana (8.7 percent), Texas (7.6 percent), and Mississippi (7.2 percent). Only three states have less than 4 percent of their credit file population with debt past due: Utah, Washington, and New Jersey.

Across the largest 100 metropolitan areas, Salt Lake City, Utah, has just 3.2 percent of people with debt past due, followed by San Jose, California, and Seattle, Washington, each at 3.5 percent. At the other end of the spectrum is McAllen, Texas, at 10.1 percent, followed at about 9 percent by Texas's El Paso and San Antonio and Louisiana's Baton Rouge and New Orleans.

Of the nearly 1,000 census tracts with at least 15 percent of people with debt past due, nearly 40 percent are in Louisiana or Texas. Almost 4,600 of the nation's census tracts—scattered throughout the United States—have no one with past due debt.

In contrast to the situations involving debt past due and collections debt, five southern states—Mississippi, West Virginia, Arkansas, Louisiana, and Oklahoma—have the lowest levels of debt and tend to have low levels of debt relative to income. In general, low-debt areas tend to be low-income and less-populous locales.

Total debt, largely driven by mortgages, is high along the Pacific Coast in California, Oregon, and Washington and along the East Coast from Washington, DC, through Boston, Massachusetts. People in these areas may have higher debt because they have higher incomes or more assets, providing them with greater access to credit. Hawaii has the highest average mortgage debt ($67,300) and Mississippi has the lowest ($16,864).

The San Jose, California, metro area has the highest average debt in the country at $97,150. California is home to 4 of the 10 most-indebted areas. McAllen, Texas, at $23,546, has the lowest average debt.