By SubPrime Auto Finance News Staff – Get the TransUnion “Determining the Risk of Bankcard Consumers Masked by Suppressed Delinquencies” report.
Perhaps here’s something that both consumers and finance companies can take as a positive from COVID-19.
Despite financial challenges brought forth by the pandemic, a new study from TransUnion indicated that 18.7 million U.S. consumers that entered a financial hardship program experienced an increase to their VantageScore 4.0 credit risk scores in 2020.
Analysts said that figure accounted for 58% of the total hardship population (excluding student loans).
TransUnion pointed out that the credit risk of those individuals in financial hardship programs often changed based on when they exited a hardship status. Analysts reiterated financial hardship is defined by factors such as deferred payment and forbearance programs for credit products such as auto financing, credit cards, mortgages and personal loans.
However, TransUnion determined consumers in financial hardship present different risks based on whether they exited or remained in financial hardship as of Q3 2020. TransUnion analyzed 1.3 million hardship consumers whose score improved in 2020 to evaluate their performance on new bankcard originations.
The early month on book performance on new bankcards for consumers who were in hardship programs is outperforming non-hardship consumers, according to TransUnion.
Hardship exiters had a 30-days-past-due delinquency rate of 4.8% six months after origination of a new bankcard in Q4 2020.
Hardship remainers had a 4.9% delinquency rate while non-hardship consumers had a 5.1% delinquency rate.
The study also found that hardship consumers in each credit risk tier were more likely to originate new bankcards after score improvement compared to those individuals who did not go into hardship.
“We drilled down further into the study and split the hardship consumers based on their current hardship status — those who exited and those who remained. We found that hardship exiters exhibit higher credit use behaviors as they are more likely to have mortgages and have higher utilization,” said Paul Siegfried, senior vice president and credit card business leader at TransUnion.
Such nuances between financial hardship exiters, remainers and various risk groups often pose a challenge for finance companies when offering new credit. The study found that applying alternative credit risk scores can help finance companies better assess borrowers.
In particular, the study found that TransUnion’s CreditVision Acute Relief Risk Score for non-prime and CreditVision Early Payment Default Score for prime and above credit tiers can better separate low- to high-risk consumers.
Further separation was evident by applying a segmentation of hardship exiters and hardship remainers.
“Many people continue to feel anxious about their finances. An important thing to keep in mind is making regular, on-time payments is one of the most important factors for credit health. If a consumer can’t make payments, they should talk with their lenders to find out if they’re offering any assistance,” said Margaret Poe, head of consumer credit education at TransUnion.
