Dear Colleague,
“Peeling back the onion” is an overused phrase, but it’s a good metaphor to describe what’s happening in the consumer credit market. If you only take a surface-level view of risk, you will overlook what’s truly occurring.
Take, for example, a top-line look at overall consumer defaults. The chart below demonstrates that default rates in 2012 for all types of consumer credit accounts had returned to 2005 levels.
What seems like a return to relative normalcy is deceiving. A more granular look at the data tells a different story.
There is actually an alarming amount of risk still in the system. Below is a chart that demonstrates default rates associated with mortgages originated prior to 2010, which are obviously still in the system.
This chart shows that bankcard and auto-loan default rates have declined since the peak of the recession in late 2008, while mortgage defaults are very close to their level at the recession peak.
A look at patterns in consumer spending on credit cards also speaks to the importance of granular data. Overall, the amount of money consumers are spending on their credit cards is now near 2007-era levels. But, as the chart below shows, a closer look reveals that those at the lower end of the credit spectrum are spending much less than their counterparts at the highest end of the spectrum. In 2008, as represented by the top line, there wasn’t a huge difference between the high scorers and the lower scorers.
Another case in point: VantageScore 3.0 leverages more granular data now available at the three national credit reporting companies (CRCs)—Equifax, Experian and TransUnion. This allows our model to differentiate and more properly gauge different types of installment loans, which include auto loans, personal and student loans.
Obviously, those three types of installment loans are very different from one another. An auto loan has collateral—the car purchased or leased—which sets it apart. Student loans differ in that some are issued privately and others by the federal government, and collections procedures differ significantly for each type. These inherent differences impact the default rates for each loan type, as depicted below.
Other credit scoring models treat all installment loans the same. Their inability to differentiate among these loan types means they lack the predictive insight of the VantageScore 3.0 model.
By using more granular post-recession data to peel back the onion, the VantageScore 3.0 model delivers greater predictiveness.
We have terrific content in this month’s newsletter, including an article that also emphasizes the importance of data granularity with respect to credit cards: We cover a TransUnion study that shows how the amount a consumer pays toward his or her credit card balance is predictive of future delinquency.
Also included is an article that discusses how our model treats installment debt, which is a question we often receive because installment loans tend to be much larger than other types of debt. Our “Did You Know” article also teaches consumers who lack credit history how to establish credit so that the VantageScore model can provide them a credit score.
And our “Five Questions With” guest is once again Neil Weinberg, editor in chief of American Banker. Neil answered our questions back in 2011 when he took the helm at American Banker. He recently moderated a panel of mortgage industry experts focused on how consumer behaviors have changed since the recession and how those changes impact the mortgage industry. We asked him about his key insights from that discussion.
Regards,
Barrett Burns