More Consumers Migrating to Higher Credit Scores Since Beginning of Pandemic, Though Some Borrowers Performing Like Those at Lower Levels
New TransUnion study shows that taking a more holistic view can help further manage risk for lenders
A new TransUnion (NYSE: TRU) study, “Score Migration Impact to the Credit Ecosystem,” found that median credit scores – aided by government assistance programs, lower credit usage and loan payment forbearance offerings – increased markedly during the early stages of the COVID-19 pandemic. Now, more than three years since the pandemic started, some consumers who migrated to higher credit score ranges are becoming delinquent on their credit obligations at higher rates than historically observed for those risk tiers.
Among the factors that led to a rise in credit scores in recent years, two have stood out: 1) lower credit balances and utilization, driven by less spending and excess liquidity from government assistance, and 2) lower delinquencies, driven by payment forbearance programs and also excess liquidity that enabled consumers to stay current.
With many activities and travel plans shut down over the course of the pandemic, particularly in its early phases, many consumers used those savings, plus additional funds provided by the federal government in the form of pandemic relief, to pay down credit balances. This ultimately led to lower balances on which consumers were more easily able to remain current and consequently lower rates of delinquency, which helped drive an increase in credit scores and more access to credit.
Median Credit Scores Rose Sharply During Pandemic and Remain Elevated Today
Median Credit Score
Source: TransUnion TruVision New Account 2.0 Risk Score1
Against this backdrop of higher credit scores, consumer demand for credit rebounded starting in mid-2021, as many government assistance programs ended and inflation began to rise. Demand was especially strong for credit cards and personal loans, products that provide immediate liquidity to consumers. At the same time, lenders’ willingness to provide such credit products increased. Credit card originations in 2022 increased 58.8% as compared to 2020, while unsecured personal loan originations were up 54.3% over that same period.
Some borrowers are reverting to prior patterns
The study revealed that many borrowers previously in riskier credit tiers who recently migrated to a higher credit risk range were more likely to fall back into some of the credit behaviors that they had displayed previously. For some, this led to delinquency rates not in line with those of consumers aligned in prior years with that higher credit score, but instead, similar to consumers who typically had scores that were, in fact, lower.
For example, the delinquency rate of the sub-segment of new unsecured personal loan borrowers in Q3 2021 who had recently migrated to a higher credit score more closely resembled that of borrowers with credit scores 25 points lower prior to the pandemic (Q3 2017 & Q3 2018). That same trend held true for credit card trade lines (25 points), while for auto loans, performance of recent migrators resembled that of borrowers with credit scores 10 points lower.
Credit scores continue to perform extremely well at their intended role of rank ordering borrower risk. That said, the temporary benefits brought on by pandemic-era government relief programs, and resulting consumer credit behaviors during that time, led to a rise in scores for many consumers, particularly those who previously had lower scores due to delinquent accounts and/or high credit utilization. Lenders would be well-advised to take a more holistic look at score migrators using data-driven insights into additional trended credit behaviors to better determine which ones are likely to remain in their elevated positions as well as those who may perform more in line with their prior score levels.
Raneri continued, “It’s important to understand that our research indicates that credit scores remain fundamentally sound. Many borrowers who have seen their credit scores rise are, in fact, performing as they should be. However, our study findings underscore the need for lenders to consider doing a deeper dive on credit score migrators beyond their initial rank-ordering – especially in the short-term as the pandemic’s impact is still being felt.”
Some lenders are already performing more due diligence on their portfolios by using solutions to complement traditional credit risk scores. For instance, TruVision Premium Attributes are being used by lenders to apply unique behavioral characteristics as an overlay to identify consumers who may pose an incremental risk and those more likely to perform well. Lenders are also using other alternative data solutions such as TruVision Blended Data to identify borrowers who typically may not be considered for a loan when only using a traditional credit risk score because of their low scores or limited credit history.
Opportunity is there to maintain a stronger credit picture
For consumers who find themselves with a score higher than one they have had in the past, there are a number of common-sense ways to help maintain it, and establish themselves as lower risk borrowers when lenders consider extending them credit.
“If you are a consumer who finds your credit score to be higher than it has been in the past, you should feel good about the work you’ve put in to get it there. But it’s important, too, to stay vigilant,” said Margaret Poe, head of consumer credit education at TransUnion. “To keep your credit score high, continue making on-time payments to your accounts, keep account balances as low as possible, and avoid maxing out credit lines. And remember to regularly check your credit report to ensure no surprises.”
1 Credit scoring data above is derived from the TransUnion TruVision New Account 2.0 Risk Score. This score serves as a proxy for other traditional generic credit scores.
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