A risk score is built to predict the likelihood of an account going into delinquency within a specified time frame (often a 2 year time-frame). It will find the “bad accounts in a larger group of predominately “good” accounts. There are differing definitions of “bad” but most commonly used is “an account that goes ever 90 + days delinquent”.
A collection score is built to predict the likelihood that an account will cure or will make any type of payment at all. In contrast to risk scores, collection scores are built to find a small number of “goods” in a larger “bad” population. A very valuable tool to help drill down into a “bad” population and find opportunities for collections.
Why should you use collection scores? There are a number of reasons.
The main reason is to segment your accounts and prioritize to target debtors you need to contact. A large number of debtors will self-cure, meaning they will bring an account up to date without any contact from the credit granter. Why waste valuable resources on these accounts? With collection scores, you can make informed decisions on where to dedicate time and human resources.
Collection scores can also be used to develop a structured and quantitative approach to outsourcing your delinquent accounts to agencies on a post charge-off basis. Oftentimes, agency assignments are made on an ad-hoc basis without any evidence to support why agencies should receive certain type of delinquent accounts.
Using collection scores to develop and monitor a risk-based pricing approach to this function leads to higher dollars collected and lower commission rates, in turn leading to an increased return to credit granters.
Lastly – use collection scores to value a portfolio that you may be looking to acquire. If allowed during the purchase and/or bidding process, collection scores can be a valuable tool in helping to estimate a purchase price and develop a business case.
To get the most out of collection scores:
- Do understand the difference between collection scores and other types of risk scores
- Use collection scores to reduce your roll rates and ultimately, bad debt losses
- Use collection scores to value a portfolio
- Create a risk-based approach to outsourcing collections with collection scores
- Do consider doing a validation to determine which collection score performs better on your portfolio (30-day, 90-day, 150-day, 180-day models, etc.)