TransUnion Credit Risk Index for U.S. Consumers Reaches Record Level
CHICAGO, April 29 -- Today TransUnion released the first installment of an ongoing analysis of the TransUnion Credit Risk Index (Index), a statistic developed to measure the changes in consumer credit risk within various geographies. The Index reached 124.79 in the fourth quarter of 2008, marking its highest value since the inception of this metric ten years earlier. The increase was especially sharp on a quarter-over-quarter basis, with the nation experiencing a 5.99 percent increase between the third quarter of 2008 (117.74) and the conclusion of last year (124.79). The Index is defined as the weighted average forecasted incidence of 90-day delinquency or worse of a given region relative to the nation as a whole.
"Because of the manner in which most credit scores are constructed, one cannot simply take the average of a pool of credit scores to get a measure of average credit risk--that is, the likelihood of defaulting on a loan," said Chet Wiermanski, group vice president and global chief scientist, Analytics and Decisioning Services. "TransUnion developed the Index to account for the non-linearity of credit scores, to provide an easy and intuitive means of measuring changes in regional risk--and comparing risk levels across regions--over time."
The Index uses the fourth quarter of 1998 as a baseline for comparison. Thus, the Index measures changes in consumer credit risk relative to the nation as a whole at the end of 1998, which might be considered a representative year of credit performance within the usual dynamic of the historical credit cycle. A value of more than 100 represents a higher level of risk.
TransUnion's Index indicates that the inherent level of credit risk within the U.S. is now 24.79 percent higher than the level reflected in TransUnion's consumer credit database on December 31, 1998. The Index experienced a 5.41 percent increase in 2008, rising from 118.38 in the fourth quarter of 2007 to its current level.
TransUnion's Index reflects the distribution of consumer credit risk as measured by TransUnion's TransRisk Account Management Credit Risk Model and is a key metric within TransUnion's Trend Data database. For comparison purposes, the Index in recent years has generally ranged between 110 and 120, experiencing a one- or two-point shift between quarters.
"The current level of the TransUnion's Credit Risk Index represents the turbulence and the economic hardships faced by consumers in today's volatile economy," said Wiermanski. "The nearly 6 percent quarterly increase within the Index by the conclusion of 2008 is noteworthy not only in hitting a record high, but also for the magnitude of the increase, reflecting in part the impact of the current recession on the credit health of consumers."
Interestingly, the credit risk level of the current recession has not yet increased at the rate experienced during the 2001 recession. Since December 2007, the Index has increased 4.98 percent (from 118.38 to 124.79); while during the 2001 recession it experienced a 6.85 percent increase (from 107.19 to 114.54). Because the current recession has not yet bottomed out, TransUnion expects the Index to continue to increase in the early part of 2009, potentially eclipsing the percentage increases from earlier in the decade.
On a year-over-year basis, Arizona (11.70 percent increase), Nevada (11.49 percent) and California (11.42 percent) had the highest percentage increases. However, when reviewing the 50 states and the District of Columbia, only 19 states experienced higher percentage increases than the national average increase.
"Not surprisingly, it appears that states that have been impacted the most by the mortgage crisis are also generally experiencing the greatest increases in Index levels," said Ezra Becker, director of strategy and consulting in TransUnion's financial services group. "However, TransUnion is cautiously optimistic: more than half of the country experienced increases less than the national average, perhaps indicating that consumers are indeed becoming more cautious in their use of credit, which in turn may temper future Index increases."
When reviewing the highest and lowest Index levels in the nation, Mississippi (164.72), Texas (161.59) and South Carolina (155.95) ranked highest. States with the traditionally lowest levels include North Dakota (79.67), Minnesota (86.76) and Vermont (91.34).
"It's important to note that the Index reflects the impact of many forces on consumers' ability to pay their debt obligations, including the regional cost of living, unemployment, consumer liquidity, and so forth. From a 'real-world' perspective, TransUnion's Index is therefore particularly insightful for lending institutions. These institutions can use the Index to better track the credit risk trends of the regions and communities across the country where they either already have an existing footprint or are looking to expand, and the associated implications for acquisition and portfolio management strategies," added Becker.
TransUnion's Trend Data database
The source of the underlying data used for this analysis is TransUnion's Trend Data, a one-of-a-kind database consisting of 27 million anonymous consumer records randomly sampled every quarter from TransUnion's national consumer credit database. Each record contains more than 200 credit variables that illustrate consumer credit usage and performance. Since 1992, TransUnion has been aggregating this information at the county, Metropolitan Statistical Area (MSA), state and national levels.