How to Compute Lagged Delinquency
Lagged delinquency is the gold standard in measuring delinquency in credit cards as it uses a method called vintage analysis. In case you don’t know, vintage analysis takes into account the period or month in which the accounts were opened. Instead of using the current balance of all non-written off accounts, the denominator for each delinquency cycle will be the total non-written off balance when the accounts in question were opened or were in delinquency cycle 0 (refer to image below for details).
Aside from this, you will also only compute the delinquency ratios from delinquency cycle 2 to delinquency cycle 6 or whatever your cut-off for write-off is. Since most credit card issuers write-off accounts at 180 days delinquent, delinquency cycle 6, which is 150 to 179 days past due, is the last cycle before accounts are automatically written-off in their systems.
You’re probably wondering why delinquency cycle 1 is not included. Since we are measuring delinquency, we only want to capture accounts that became delinquent due to external factors such as changes in the client’s financial situation, medical emergency, etc. Accounts that became delinquent as a result of internal errors like the non-delivery of SOAs or statements of account to cardholders should not be included in our measurement. While they are technically past due, they would only distort our data and possibly lead us to the wrong conclusion.
Lagged delinquency can also be considered as a performance assessment tool. Since most of your efforts to contain delinquency start at 1 day past due or delinquency cycle 1, it is only logical that you start evaluating your collections team starting at delinquency cycle 2.
Benefits of Using Lagged Delinquency
Computing lagged delinquency is a bit more complicated than coincident delinquency since it entails backtracking. However, the advantages of doing so far outweigh the increased complexity in computation. By using this method, you will be able get a more accurate picture of your portfolio’s health. First of all, the delinquency ratios for each cycle or bucket will already be fixed to a specific denominator. Only the numerator, which is the delinquent balance for that bucket, will experience fluctuations throughout the month as accounts flow in whenever there are cycle dates. Accounts can also move out of that delinquency bucket when clients make payments that are more than enough to cover the delinquent amount. If the payment is enough to cover the total minimum due, the account gets removed from the delinquent portfolio entirely. If it’s only enough to cover the delinquent amount for that bucket, then the account gets pushed back to the previous delinquency cycle.
Another advantage of lagged delinquency is that it allows you to immediately spot potential problems and point you to its source. If a particular delinquency cycle deviates too much from its historical average, you can easily trace back its source and check if your company implemented credit policy changes or your marketing team targeted a new customer segment during that period. This is the vintage analysis component that was mentioned earlier in the article. Lagged delinquency allows you to take into account the period or month in which accounts were opened. By having this embedded in the formula, it allows the person or team to gain better insights as to what is causing the spike in your delinquency.
Conclusion
As you have seen, lagged delinquency is a valuable tool in measuring the health of your company’s portfolio and evaluating the performance of your collections team. It is superior to coincident delinquency as the latter only uses the current non-written-off balance for its denominator. However, for you to have a holistic view of your credit card or loan portfolio, you need to use other monitoring tools such as monies collected, collection rate, and flow rate, to name a few. By using all these tools in conjunction with each other, you will have a more detailed and accurate view of your portfolio. This will allow you and your team to devise better credit policies and implement collection strategies that will help lower your company’s delinquency.
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