Beyond Credit Scores: Why the Whole Consumer Matters

In a murky and  mysterious economic landscape, there can be uncertainty and hesitation. In July’s Market Pulse webinar, we discussed key takeaways to ensure you’re well-positioned to focus on  forward while building resilience - despite the unknowns. 

Our contributors included Dr. Robert Westcott, President and Founder of Keybridge, an economic policy firm in Washington, D.C. Joining us from Equifax, Risk Advisor Maria Urtubey shared consumer credit trends and insights, and Tom Aliff, Risk Advisor Leader, moderated our panel discussion. We welcomed Dr. Rikard Bandebo, Chief Product Officer at VantageScore, and Tommy Lee, Senior Director at FICO, as our guest speakers who offered valuable insights around enhancing account management. 

Macroeconomic Observations and Updates

Dr. Robert Wescott shared an overview of the current macroeconomic environment. 

Looking at the labor market, we see a slowdown. When the economy is slowing, we look for revisions in prior months. In the current case, we see there were not as many jobs created in early summer as originally posted. We see a softening in overall hiring as businesses brace for presumed economic headwinds. Although inflation is not out of control, it is still higher than average. Wescotte expects another potential hike in interest rates to get ahead of a possible recession. 

A global economic slowdown is also potentially on the horizon. Consumer spending was up from the pent-up demand of the past few years, but the majority of those reserves have dried up. When it comes to banks, we see less demand, tighter lending practices, and higher interest rates on deposits. Revolving credit debt has increased as households are using credit cards to fund purchases. Although most believe they feel poorer than they were a year ago. Furthermore, delinquencies are slightly higher, specifically with auto loans and young borrowers. 

Finally, with student loan repayment beginning in October, another significant hit to consumer spending is set to take place. We predict a slowing in non-essential and leisure spending.

Consumer Credit Insights and Trends 

Equifax Risk Advisor Maria Urtubey shared a high-level overview of the critical information that has just been released from the previous few months. Highlights include:

Originations: 

• Mortgage origination saw a 58% decrease since same time of year in 2022; auto originations are up 8.5%, but also saw a 10% decrease in balances while experiencing the lowest subprime share in over 10 years

• Bankcard limit originations up, but subprime share decline almost 3%; private label limit originations are down, and subprime share continues to decrease 

• Unsecured private loan balances, as well as the number of new loan originations, saw sharp decline; the subprime share rose

• Home equity revolving limit and unit originations saw steep decline, yet subprime share saw a small increase

Debt:

• Mortgage debt rests at over $12 trillion with non-mortgage debt beginning to flatten 

• Revolving debt is at its highest level ever; non-revolving debt increased for the second straight month

• Subprime bankcard utilization is higher than during the pandemic, but prime bankcards have been dropping over the last several months 

• Delinquencies across auto, bankcard, private label, and mortgages have all decreased year-over-year 

Lenders can focus on forward and find hidden opportunities by increasing the frequency of account reviews to quickly identify hidden risk.

Deeper Insights on Enhancing Account Management

“Consumers are not scores. Consumers can both migrate up and down in their profile based on life circumstances. It's really important to stay connected to that.” - Tom Aliff

Tom Aliff moderated an informative discussion between Dr. Rikard Bandebo of VantageScore and Tommy Lee from FICO. An overview of their commentary on consumer profiles and evolving credit landscape fell into four categories: the current credit landscape, how credit scores impact consumers, utilization insights, and student loans. 

Credit Scores 

Regarding perspectives on credit scores and where they currently stand, we need to turn our focus to the previous few years. Although it was an oppressive time, it also allowed some to pay down debt; therefore, credit scores increased. The economy was infused with, and fueled by, stimulus. 

Now, stimulus has ended, and lenders need to account for the debt that had been ignored being called in. FICO scores have increased since the start of the pandemic, but we have to think about the entire credit ecosystem. How much income do consumers have in collateral? What is their loan-to-value rate on their secured products? What are the conditions in the economy in terms of things like the unemployment rate or government stimulus? 

So, in many instances, the credit report and the credit scores are not the only considerations. Because of these factors, we are starting to see, though repayment levels, credit scores are changing over time. 

Consumer Impact

How should risk managers stop thinking about credit scores or utilizing them to prepare for different economic possibilities going forward? Aggressive account reviews. 

It is imperative to acknowledge credit scores, microscores, and advantage scores as they are quite predictive metrics. However, lenders must not only understand credit risk and their financial underwriting models, but also think about understanding resilience in their credit portfolios, having a more fine-tuned approach to both underwriting as well as their calibration models. So, using all available data, lenders need to understand different ways to pivot. The winning strategy is based on what we think will happen going forward.

Monitoring unemployment, job openings, inflation, and many other micro factors have the impact of pushing everybody's risk score up or down. While keeping that information in mind, along with focusing on delinquency rates from different vantage points, regular account reviews allow lenders to consider additional, pertinent information. 

While the credit file is very predictive, it does not tell lenders everything. We know bank data is not the best source for the study of factors, including income, how much of that income consumers are spending each month, how that is changing over time, and so forth Therefore, lenders are better off incorporating as much information as possible - as frequently as possible.

Utilizations

Concerning drops in utilization, they can vary quite significantly depending on the type. For instance, regarding student loan delinquency by missing just one payment, there can be a resulting negative score impact of 82 points. So, even if consumers are not actually missing payments, the impact of one blip can become quite significant.

We should also emphasize the impact of a delinquency is highly dependent on the starting profile of the consumer. So, if you have a 600-score consumer who misses a 30-day delinquency, but they have so many other delinquencies on the credit report already, their score might only drop 20 points. However, if you have a super-prime, 800-score consumer missing a payment, that could be a significantly larger drop because they have no other form of delinquency on the credit report. 

Student Loan Repayment 

One of the hottest topics right now is the student loan marketplace, and we want to help consumers be prepared for the potential impact.

Generally speaking, the trends in default rates increased in the last year or so. Since student loan borrowers, just like the total population, are not all the same, lenders really must look at all the data available. These student loans are going to be lower in the payment hierarchy, therefore another thing to keep in mind is the delinquency on student loans will likely not impact credit scores in the first year. Ultimately, though, there are a lot of unknowns.

The greater concern is how student loan repayment is going to impact the ability to make ends meet overall. Potential for reduced spending, lowered repayment rates, and missed payments are possible outcomes. These habits, as we have discussed, will impact the overall economic climate for everyone. 

Key Takeaways

The most important priority for lending teams is to closely monitor their accounts on a frequent basis, as well as consider the consumer as a whole. The importance of frequent account review cannot be understated, and lenders should be checking the most current credit scores available as they are the most predictive of what is to come. Consumers with lower scores are more likely to have large score changes month to month, so it is vital to conduct account reviews early and often.

For more information on the latest Equifax Consumer Credit Trends and to register for future Market Pulse events, check out our Market Pulse hub. If you missed our June 2023 Market Pulse webinar, you can view the slides or watch the recording.