TransUnion study finds that credit risk often changed based on when consumers exited hardship programs
Despite financial challenges brought forth by the COVID-19 pandemic, a new study from TransUnion found 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. This accounted for 58% of the total hardship population (excluding student loans).
Yet, the credit risk of those individuals in financial hardship programs often changed based on when they exited a hardship status. Financial hardship is defined by factors such as deferred payment and forbearance programs for credit products such as auto loans, credit cards, mortgages and personal loans.
“COVID-19 has presented enormous financial challenges to consumers and businesses, especially during the first six months of the pandemic,” said Paul Siegfried, senior vice president and card and banking business lead at TransUnion. “Our research shows that while many consumers were negatively impacted by the pandemic, the majority experienced an increase in their credit scores.”
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However, consumers in financial hardship present different risks based on whether they exited or remained in financial hardship as of Q3 2020. TransUnion analyzed 1.3M 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. Hardship exiters had a 4.8% 30+ days past due delinquency rate 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 Siegfried.
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Assessing Risk in a New, Complex Lending Environment
Such nuances between financial hardship exiters, remainers and various risk groups often pose a challenge for lenders when offering new loans. The study found that applying alternative credit risk scores can help lenders 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,” concluded Margaret Poe, head of consumer credit education at TransUnion.
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