Forbearance Plans for Credit Card Accounts

Agarwal, S., Chomsisengphet, S. & Mielnicki, L. (2008). Do forbearance plans help mitigate credit card losses? Journal of Family and Economic Issues, 29(2), 191-209.

Brief Description: Credit cards are the means of payment for millions of routine transactions, with the volume of credit card debt increasing dramatically in the last few years. This has led secondary market agencies, investors, and insurers of credit cards to employ forbearance options such as lengthening repayment terms, lowering interest rates, and permitting card holder to re-instate 90 day delinquent status on a minimum payment towards the debt. It was found that most (78%) of re-instated credit card accounts stayed current, with only 22% defaulting again. Average FICO scores for the 78% of re-aged consumers rose by 20 points after re-aging, indicating an improvement in their overall risk profile.

Implications: The results provide support for the notion that offering forbearance plans overwhelmingly helps liquidity-constrained consumers to cure out of default. Policy makers should consider regulations that encourage lenders to offer forbearance options to defaulting borrowers. This may prevent greater losses for both borrowers and lenders.