There are several different levels of receivables available to debt buyers. These levels include fresh, primary, secondary, tertiary, etc. Depending on their goals and objectives, debt buyers will focus in on different areas.
Levels of Credit Card Receivables
- Fresh– Credit card receivables that are typically 150-180 days delinquent. The issuing bank has not utilized external collection methods.
- Primary– Credit card receivables that are on average more than 180 days delinquent, and on which collection efforts have been made by one collection agency.
- Secondary– Credit card receivables that have already passed through the hands of two collection agencies but remain outstanding.
- Tertiary– Credit card receivables that have passed through the hands of three or more third- party collection agencies, and/or have been archived as uncollectable.
As you move further down the list, the cost of portfolios becomes cheaper which on the surface seems to increase our reward…but what about the risk? These accounts have been through multiple collection agencies and most of the easy money has been extracted. The chance of collecting on any individual account is low. In order to meet your investment objectives you will need to shoot for a very high reward to risk ratio, somewhere in the neighborhood of 5-1 or higher.
At Ropay Asset Investors we focus on “FRESH” charged-off credit card debt because we feel it offers us the optimal combination of risk and reward. Since portfolios at this level have not yet been outsourced for third party collection, the low hanging fruit has not been picked out yet. Although this debt will cost more, we have more opportunities to collect which enables us to lower our reward to risk ratio substantially and still have large enough margins to cover the acquisition cost, the financing the cost, the collection cost, reserve contingency and a large profit.