A decline in overall credit risk can be attributed to a national drop in credit card, auto loan and mortgage delinquency rates, which are at near historic lows, according to TransUnion officials.
TransUnions Credit Risk Index (CRI), a measure of aggregate credit risk in the nation, fell to 110.10 in Q4 2013, the lowest mark since 2005. This also is a drop from Q4 2012, when the CRI was 120.64.
Lenders take credit risk into account when determining credit offers, so this level of overall reduced consumer risk may mean that riskier consumers those with a lower credit score may receive more credit offers as lenders decide they have room to take on more risk.
With auto loan and credit card delinquency levels hovering near all-time lows for the last two years, and with mortgage delinquencies seeing their biggest drop in 2013 since the housing bubble, a decline in go-forward consumer credit risk would be expected. However, it was a pleasant surprise to see the Credit Risk Index drop to levels not seen in nearly 10 years, said Ezra Becker, vice president of research and consulting for TransUnions financial services business unit. This improvement is driven by a myriad of factors, including consumers better maintaining their credit relationships and fewer subprime and near-prime consumers opening new credit accounts. With credit risk at such low levels, there is a possibility that consumers in higher risk segments may see more credit offers, as some lenders decide they have the room in their profit models to take on greater risk.
Key Data Points
- The CRI dropped to 110.10 in Q4 2013, down nearly 9 percent from the 120.64 reading in Q4 2012.
- The CRI peaked in Q4 2009 at 129.67, 15 percent higher than the current level.
- States experiencing the greatest CRI improvements in the last year, include:
- California (-12.97 percent from 115.75 in Q4 2012 to 100.74 in Q4 2013)
- Nevada (-12.94 percent from 150.31 in Q4 2012 to 130.85 in Q4 2013)
- Florida (-12.17 percent from 140.35 in Q4 2012 to 123.27 in Q4 2013)
- Hawaii (-11.62 percent from 92.77 in Q4 2012 to 81.99 in Q4 2013)
- Highest risk states: Mississippi (152.67), South Carolina (139.27) and Louisiana (139.07)
- Lowest risk states: North Dakota (74.57), Minnesota (78.47) and Hawaii (81.99)
- While credit scores are highly effective at measuring individual consumer credit risk, averaging credit scores does not yield accurate measures of the average riskiness of a population because credit scores are not linear.
- To address this issue, TransUnion developed the CRI as an accurate measure of population risk.
- The CRI measures changes in consumer credit score distributions relative to the national distribution and delinquency rates as a whole at the end of 1998.
- 1998 is considered by TransUnion as a representative year of credit performance within the usual dynamic of the historical credit cycle. A value of more than 100 represents a higher level of relative risk.
- For comparison purposes, the CRI had generally ranged between 110 and 120 between 2001 and 2007, experiencing a one- or two-point shift between quarters. Since the latest recession, the CRI mostly stood between 120 and 130.
- The CRI allows for accurate comparisons of risk between geographies, and within a given geography over time.