Understanding credit scoring
behavior given recent credit
challenges
Sarah Davies, VantageScore Solutions
Kari Michel, Experian
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Credit quality
As we near the end of a recession where credit quality has deteriorated across
the entire credit spectrum
►
How and where has consumer credit quality changed over the last
24 months?
●
►
Review of recent events and score trends
Can consumers of stable or improving credit quality be identified for
lender focus for acquisition or improved existing account profitability?
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Recent events and score trends
ƒ Mortgage restructuring and payment hierarchy shifts
►
Trends in mortgage payment hierarchy
►
Score impacts from mortgage restructuring scenarios
►
Score rehabilitation
ƒ Bankcard credit line decrease
►
Consumer responses to expansive credit limit reduction strategy
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Payment behavior is shifting
% of delinquent population
Consumers with at least one delinquent trade are increasingly paying
their card and auto before their mortgage
First mortgage
clean* with other
delinquencies
First mortgage
delinquent, but
all other trades
clean*
First mortgage
delinquent, with
other delinquencies
First mortgage
in derogatory
status (bankruptcy,
foreclosure, short
sale, settlement, etc.
* Clean: Debts maintained in good standing, although an occasional 30-day delinquency may have occurred. Data used throughout presentation provided by TransUnion
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Score impacts from mortgage
restructuring scenarios
ƒ No impact when payments are made
on schedule
ƒ Account removed with deferral
ƒ Utilization reduction overall
ƒ Average account age reduced due to
new loan
ƒ Higher loan amount
ƒ Age reduced from new loan
ƒ Utilization reduction
ƒ Account highly delinquent
ƒ Derogatory status
ƒ Derogatory status, public record
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Consumer VantageScore rehabilitation
Consumers can rehabilitate their score within nine months if they can bring
all debts current with a restructure
VantageScore
900
800
700
600
500
Starting Score
Score After Mod
All trades become current
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3 mo.
6 mo.
12 mo. 24 mo.
Nine months
Only mortgage becomes current
Bankruptcy
6
Bankcard credit limit adjustments
in Q1 2009 – What happened?
Credit limits are frequently adjusted (up and down) within a nominal range
according to individual bank strategies
►
The December 2008 – March 2009 quarter reflected the first time
that limits significantly decline
Average credit limit charge
20.00%
15.00%
10.00%
5.00%
0.00%
Mar 08
Jun 08
Sep 08
Dec 08
Mar 09
Jun 09
‐5.00%
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Approximately 49% of consumers received
a reduction, 14% received an increase
Total active bankcard credit line
ƒ Average credit limit reduction was 19%, average increase was 15%
ƒ Note that credit limits are already significantly higher than typical balances, particularly
in the high score bands – the majority of the credit limit reduction focused on high credit
quality bands
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Open bankcard trades
Available credit was also impacted by significant account closures, typically
inactive accounts
Number of open bankcard trades
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Consumer balances and utilization
Low score consumers respond to the credit adjustment, although
most remained far below their limit and experienced no material impact
Total balance on open bankcards
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Consumer delinquency trends
Number of bankcard trades 30+ days delinquent in the last three months
ƒ Pre- December 2008 delinquency may have been a factor in credit line reduction
ƒ Regardless of the nature of limit adjustment, environmental factors play a greater role in
driving delinquency
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Consumer delinquency trends
ƒ Regardless of the nature of limit adjustment, environmental factors play a greater role in
driving delinquency
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Impacts to scores
Average VantageScore®
ƒ Credit scores reflect a slight reduction due to limit reduction
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Impacts to scores
700-800 Score Band
500-600 Score Band
30+ dpd index
30+ dpd index
Decrease
Increase
No change
Decrease
Increase
No change
ƒ CLI and CLD populations reflect similar score profiles despite opposite limit adjustment
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Bankcard credit limit adjustments
in Q1 2009 – In the end...
ƒ The majority of card line reductions have had no adverse impact on
consumer behavior
ƒ From a risk management perspective, the line reductions and account
closure initiatives have removed a significant portion of excess, unused credit
from the system
Total Number of Open Bankcard Trades
Total Credit Limit on Open Bankcard Trades
Total Balance on Open Bankcard Trades
Average Credit Limit
Average Balance
Average Utilization
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June 2008
June 2009
Difference
399,398,505 324,066,226 (75,332,279)
$ 3,321,425,173,165 $ 2,665,010,717,735 $ (656,414,455,429)
$ 573,298,609,432 $ 527,477,828,627 $ (45,820,780,805)
$ 8,316 $ 8,224
$ 1,435 $ 1,628
17%
20%
15
Consumer score migration profile
Super prime (900-990)
Consequently, how have consumer scores and risk changeover
the last 24 months?
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Consumer score migration profile
Prime(700-899)
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Consumer score migration profile
Near-prime (640-699)
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Consumer score migration profile
Subprime (501-639)
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Increasing environmental credit
deterioration
As a result of increasing environmental credit deterioration,
score cut-offs should be reviewed and revised accordingly
Existing accounts – 90+ days past due: All industries
ƒ Example: 90+ days past due for a consumer with a score of 730 has increased by 80%
(from 1.0% to 1.8%)
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Given the dynamics of risk deterioration
across the entire credit spectrum…
Can credit worthy consumers be identified using credit
scores in conjunction with additional credit file insights?
►
►
STABLE: Consumers that stay within the same
credit tier for one year
IMPROVING is defined as consumers that move
to a higher credit tier in any quarter and remain
at a higher credit tier for the remainder
of the timeframe
Further, are there segments that should be avoided
despite apparent creditworthiness?
►
DETERIORATING is defined as consumers
that move to a lower credit tier in any quarter
and remain at a lower credit tier for the remainder
of the timeframe
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ƒ Signaling
ƒ Credit
footprint
ƒ Utility
21
Identifying creditworthy consumer segments
with scores and credit characteristics
Stable population
Distinguishing characteristics when compared against all other behavior
categories
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Identifying creditworthy consumer segments
with scores and credit characteristics
ƒ More than 50 million consumers can be identified who demonstrate robust and stable
credit quality (prime and super prime)
►
Of which more than six million consumers are unscoreable with traditional
credit scores
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Identifying creditworthy consumer segments
with scores and credit characteristics
Improving population
Distinguishing characteristics when compared against all other behavior
categories
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Identifying creditworthy consumer segments
with scores and credit characteristics
ƒ Nearly 11 million consumers can be identified who’s credit quality improves
over time
►
Of which more than one million consumers are typically unscoreable
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Identifying non-creditworthy consumer segments
with scores and credit characteristics
Deteriorating population
Distinguishing characteristics when compared against all other behavior
categories
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Identifying non-creditworthy consumer segments
with scores and credit characteristics
ƒ Eleven million consumers can be identified with declining credit quality
►
Eight million of these consumers are currently prime and super prime quality
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Summary
ƒ Over 50 million consumers can be readily identified using VantageScore®
and key credit characteristics as creditworthy
►
Seven million of these consumers are traditionally unscoreable
with standard score algorithms
ƒ Eleven million consumers can be identified that are likely to experience
continuing deterioration in credit quality
ƒ Lenders can apply a similar approach to their universe and portfolios
in order to effectively isolate profitable populations for acquisition
and existing account management strategies with VantageScore®
and credit file behaviors using segmentation logic strategies
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For additional information,
please contact:
[email protected]
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