How Can Lenders Build Growth on Stable Consumer Credit?
At the start of 2020, no one could have expected where we would be today. With an economy rocked by closures, rising unemployment rates and stay-at-home orders, one of the main concerns was how consumers would fare during such an uncertain time, especially in terms of managing their financial health and credit history.
Despite many challenges, new data shows consumers are managing credit better than expected. Many consumers were managing their debts long before Covid and this may have placed them in a better position to cope with the financial challenges of the pandemic. Likewise, accommodations, such as forbearance, offered by the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 may have provided consumers with a buffer to protect their financial health, allowing them save money, continue to make payments on time, and reduce debt.
A promising green light:
The Consumer Financial Protection Bureau reports that credit demands have returned to pre-pandemic levels, as consumers re-enter the economy and feel more comfortable increasing their spending.
With that in mind, how can banks and credit unions increase their lending? First, they need to understand current consumer credit trends in order to extend credit responsibly. Second, they need to understand that not all consumers are well placed. Finally, they can explore the use of non-traditional loan data to expand the pool of potential borrowers.
Positive consumer credit trends that were not predicted
Experienced 2021 Credit Status Report indicates that the average credit score increased by seven points year over year to reach 695 in 2021. This is the highest point in more than 13 years.
Declines in three important metrics – credit card balances, usage rates, and missed payments – are behind this upward trend.
Today, the average credit card balance is $ 5,525, up from $ 5,897 in 2020 and $ 6,494 in 2019. Payment defaults have also declined year over year, with average rates falling. 30 to 59 day default from 2.4% in 2020 to 2.3% in 2021. This decrease in payment defaults shows, despite the significant challenges associated with the pandemic, how consumers continue to make responsible choices to protect their financial health. This is further demonstrated by the drop in average utilization rates, which fell to 25% from 26% in 2020 and 30% in 2019.
While the overall view of consumer credit is insightful and tends towards a positive trend, a generational perspective can provide lenders with a more detailed view of how consumers manage their credit history.
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Young consumers generate positive results
The Experian report states that consumers of all age groups are making responsible choices when it comes to managing credit, with average credit score improvements for each generation from year to year. Consumers in the Boomers (724) and Quiet (730) generations had the highest average scores, while the Z (660), Y (667) and X (685) generations scored in the mid-to-high 600. This trend can be attributed to lower utilization rates, associated with fewer missed payments. In fact, credit utilization rates have declined for almost every generation since 2019 except Gen Z, which has seen a slight increase year over year.
As Gen Z consumers make more use of their available credit, there are encouraging signs on how younger consumers are handling credit. For example, Gen Z consumers miss fewer payments than Gen Y or Gen X. For accounts past due 30 to 59 days, the average failure rate for Gen Z consumers is 2.1%. , compared to Generation Y (3.1%) and Generation X (3.0%).
The lowest plastic debt:
Generation Z has the lowest average credit card balance of any generation at $ 2,312.
As financial institutions look to grow, it’s important to keep an eye on how young consumers are managing their credit.
More articles from The Financial Brand on Gen Z:
Expanded data generation opportunity for consumers and lenders
While the report’s findings are positive, there is more to tell. Some consumers come out of the pandemic relatively unscathed, but others continue to face financial challenges.
What to watch:
There are millions of consumers who do not have 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 such as cell phones, utilities, and video streaming services.
Taking into account these data sources creates a new possibility for consumers to build their credit history and access affordable credit options. Additional extensive data sets – including verified income and employment information, rent payments, trend data, public records and more – can help paint a more complete picture of the financial picture. of a consumer.
With a better understanding of a consumer’s stability, ability and willingness to repay, more lenders can say “yes” to consumers to whom they might not or would not otherwise lend. In fact, some of the newer scoring models available can help lenders score 96% of US consumers.
These models help consumers access the credit they need while enabling lenders to extend credit responsibly while mitigating risk. The information they produce can pave the way for increased financial access for tens of millions of American consumers.
Financial institutions that harness the power of advanced data and analytics will be in a better position to grow their businesses while promoting financial equity and access.