How Can Lenders Build Growth on Consumer Credit’s Stability?

Many people came through the pandemics shutdowns and worse without wrecking their credit, due to a combination of forbearance programs and self-rationing of debt. Yet while appetite for borrowing is picking up again, many consumers still have trouble accessing mainstream lending. Use of alternative data can help.

At the start of 2020, no one could have expected where we’d be today. With an economy rocked by shutdowns, soaring unemployment rates and stay-at-home orders, a key concern was how consumers would fare over the course of such an uncertain period, especially in terms of managing their financial health and credit histories.

Despite many challenges, new data show consumers are handling credit better than many expected. Many consumers were managing debt well before Covid and that may have put them in a better position to weather financial challenges related to the pandemic. Similarly, accommodations, such forbearance, afforded by 2020’s Coronavirus Aid, Relief and Economic Security (CARES) Act may have provided a buffer for consumers to protect their financial health, allowing them to save money, continue to make on-time payments, and lower their debt.

A Promising Green Light:

The Consumer Financial Protection Bureau reports that credit applications have returned to pre-pandemic levels, as consumers re-enter the economy and feel more comfortable increasing their spending.

With this in mind, how can banks and credit unions grow more loans? First they must understand current consumer credit trends, in order to extend credit responsibly. Second, they need to understand that not all consumers are in a good place. Finally, they can explore use of nontraditional lending data in order to expand the pool of potential borrowers.

Positive Consumer Credit Trends that Weren’t Anticipated

Experian’s 2021 State of Credit report indicates that the average credit score increased seven points year-over-year to reach 695 in 2021. That’s the highest point in over 13 years.

Decreases in three important measures — credit card balances, utilization rates and missed payments — are driving this upward trend.

Today, the average credit card balance is $5,525, down from $5,897 in 2020 and $6,494 in 2019. Delinquencies also declined year-over-year, with the average 30-59 days past due delinquency rates dropping from 2.4% in 2020 to 2.3% in 2021. This decrease in delinquencies shows, despite significant pandemic-related challenges, how consumers are continuing to make responsible choices to protect their financial health. This is further demonstrated by the decrease of average utilization rates, which dropped to 25% from 26% in 2020 and 30% in 2019.

While the overall view of consumer credit is insightful and trending positive, a generational perspective can provide lenders a more detailed view into how consumers are managing their credit histories.

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Younger Consumers Driving Positive Results

The Experian report states that consumers across all age groups are making responsible choices in terms of credit management, with average credit score improvements seen for every generation year-over-year. Boomers (724) and Silent (730) generation consumers came in with the highest average scores, while Gen Z (660), Gen Y (667) and Gen X (685) ranked in the mid-to-high 600s. This trend can be attributed to declining utilization rates, coupled with fewer missed payments. In fact, credit utilization rates have declined for nearly every generation since 2019, except Gen Z, which saw a slight uptick year-over-year.

While Gen Z consumers are using more of their available credit, there are encouraging signs about how the youngest consumers are managing credit. For example, Gen Z consumers are missing fewer payments than Gen Y or Gen X. For accounts that are between 30-59 days past due, the average delinquency rate for Gen Z consumers is 2.1%, compared to Gen Y (3.1%) and Gen X (3.0%).

The Lowest Plastic Debt:

Gen Z holds the lowest average credit card balance of all generations at $2,312.

As financial institutions look to grow, it’s important to keep an eye on how young consumers are managing credit.

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Expanded Data Drives Opportunity for Consumers and Lenders

While the findings from the report are positive, there is more to the story. Some consumers are emerging from the pandemic relatively unscathed, but others continue to face financial challenges.

What to Watch:

There are millions of consumers who lack access to credit due to a limited credit history. These consumers face significant barriers to accessing fair and affordable credit.

However, many of these consumers also make on-time monthly payments for items like cell phones, utilities and video streaming services.

Factoring in these data sources creates a new avenue for consumers to build their credit history and gain access to affordable credit options. Additional expanded data sets — including verified income and employment information, rental payments, trended data, public records and more — can help paint a more complete picture of a consumer’s financial situation.

With a clearer understanding of a consumer’s stability, ability and willingness to repay, more lenders can say “yes” to consumers they otherwise couldn’t or wouldn’t lend to. In fact, some of the newest score models available can help lenders score 96% of U.S. consumers.

These models help consumers gain access to the credit they need while enabling lenders to extend credit responsibly while mitigating risk. The insights they produce can pave the way to increased financial access for tens of millions of U.S. consumers.

Financial institutions that harness the power of data and advanced analytics will be better positioned to grow their businesses while also driving financial equity and access.

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