Banks could significantly cut delinquent accounts by establishing multiple lending relationships with customers, according to a report by the credit bureau TransUnion LLC.
This could be especially important for card issuers whose revenue increasingly is being squeezed by legal and regulatory constraints from the Credit Card Accountability, Responsibility and Disclosure Act, said Ezra Becker, the director of consulting and strategy in TransUnion's financial services business unit.
TransUnion, of Chicago, compared lending information from six "superregional" financial institutions — three banks and three credit unions — for the Decembers of 2007, 2008 and 2009. Roughly 19 million consumers were included in each review, and more than 400 million credit relationships.
The report, which was released Tuesday, examined the correlation between the number of consumer accounts 30 days or more delinquent and the number of accounts the borrower held with the lender. The account types included mortgages, auto loans, home equity lines of credit and other types of loans.
In December 2007, the average credit card 30-day delinquency rate stayed steady at 1.4% of accounts when the borrower had one to three credit relationships with the lender, and fell to 1.3% with four relationships and to 1.2% with five.
Toward the end of the recession, though, consumers placed greater value on their credit cards, and card account delinquencies dropped considerably when the borrower had multiple lending relationships the financial company, the study found. The average credit card 30-day delinquency rate in December 2009 was 2.7% among borrowers with one lending relationship with an institution. However, the rate dropped to 2.3% with two relationships, to 2.1% with three and to 1.6% with five or more loans with the lender. "The key lesson there is that card loyalty differs with different economic environments," Becker said.
In 2007, issuers bombarded consumers with card offers, and many consumers held more than one card. Two years later, when credit dried up, the offers dropped off, making existing card relationships more important, Becker said. "A lot of the economic forces of the recession changed the hierarchy of payments," he said. "We found that maintaining the health of a card relationship was far more important than at the beginning of the recession."
TransUnion's research only examined the number of delinquent accounts, not the amount of debt, Becker said. "The question of severity of loss given defaults absolutely is something that should be addressed and explored when one considers quantifying loyalty and incorporating that into a lending strategy," Becker said. "It is not the end-all study. It merely opens the door into studying new areas of risk management."