TransUnion: Credit Scores Are Poor Indicators Of Delinquency

By Pete Rizzo, Editor (@pete_rizzo_)

Subprime, prime and super-prime have long been the standard credit score categories used by financial institutions to gauge the risk posed by borrowers. Are these indicators now failing to accurately predict how likely consumers are to pay back loans?

This was the underlying question TransUnion sought to answer in its new Minimum Vs. Actual Payments Study. Released in July 2013, the major credit bureau analyzed 22 million auto loan consumers, 17 million card consumers and 12 million mortgage consumers over a 12-month period. 

The goal was to understand whether existing credit score categories were effective at helping lenders measure risk and evaluate marketing opportunities.

TransUnion began its search by breaking down revolving payers from all credit score categories into subsets. Revolving payers were defined as consumers who were likely to make less than the full payment on at least one bankcard each month. Revolving payers were then divided into partial payers, who paid a greater sum than the minimum due, and minimum payers, who paid only the minimum balance.

TransUnion said this distinction is especially important to make at a time when minimum payers are one of the largest, and fastest growing, shares of the borrowing population.

One conclusion from the report is that delinquency rates across all borrower categories were higher for mortgage loans than auto loans. But, a deeper look reveals something more: a flaw in the categories used by major lenders to assess borrowers.

Except for the sizeable gap between subprime and near-prime loans, delinquency percentages across prime categories did not differ enough to indicate these categories were part of a viable marketing or lending strategy.

The charts suggest that in order to better understand borrowers, more research needs to be conducted to more effectively segment the subprime borrower category. 

This finding led the report to ask whether consumers in better-performing credit score categories really were minimum payers, borrowers who could only meet the minimum payment, or whether they were simply savvy about how they made payments to avoid interest rates.

For additional insights into this question, download the full report here.