A comparative TransUnion study revealed that consumers’ credit card payment habits and lending risk mirror attitudes towards mortgages and auto loans. Findings indicate credit card payment metrics can help measure mortgage risk.
According to Becker findings are “just the tip of the iceberg.”
This first-of-its-kind credit card-mortgage delinquency risk correlation study confirmed the conventional wisdom that borrowers who pay more than the minimum payment due on their credit cards “have significantly lower delinquency rates” on all their loans, including mortgages, he explained, while those who made the minimum or close to minimum payment, “generally had higher delinquency rates.”
Behavior traits helped researchers to quantify customer credit risk changes. The study compared variations in the delinquency rate between the so-called revolvers, consumers who only pay a portion of the amount due on their credit card, and transactors, who pay off their entire balance each month.
Transactors, who pay in full, represent 42% of consumers in study, partial payment revolvers 40% and minimum payment revolvers 18%.
Data show transactors are three to five times less risky than revolvers.
As expected it confirmed transactors “are better risks than revolvers,” he said, but just as importantly, the study revealed that customer behavior is much more complex than it appears at first glance.
A deeper analysis of revolvers shows they are not equal. Those who pay more than the minimum on their credit cards, “even if they don’t pay off the full balance,” present less risk across product types. These findings are good news for consumers, he said, particularly revolvers, since lenders “may view them in a more positive light depending on the amount they do pay.”
TransUnion found that of the consumers who make monthly payments on their credit cards about four in 10 pay off their entire credit card balance, six in 10 pay a portion of the balance, and of those six consumers two will pay off only the minimum owed.
New metrics developed by TransUnion as part of this study include the Total Payment Ratio, which can be used to analyze how credit users performed on various loan types, and the Aggregate Excess Payment.
TPR is calculated by dividing a consumer’s total monthly credit card payments by the total minimum due on all of that consumer’s credit cards. For example, a person making $1,200 in payments on three credit cards when the aggregate minimum due on those cards was $600 would have a TPR of 2.0.
Data show that as TPR increased, delinquency levels decreased on credit cards, auto loans and mortgages.
It persists, Becker said, even among some individuals with lower credit scores but higher TPR levels who “outperformed those with higher credit scores but lower TPR levels.”
TransUnion evaluated performance on 12 million mortgage consumers, 17 million credit card consumers and 22 million auto loan consumers as of September 2012.
The only anomaly, he said, was that higher TPR levels “resulted in higher auto and mortgage delinquencies for subprime and near-prime mortgage borrowers,” mainly due to the mortgage crisis and its impact on those consumers facing foreclosure who chose to placed “a higher emphasis on paying off their credit cards.”
TransUnion developed AEP “to better gauge how many dollars in excess of the minimum payment” were paid by the customer by subtracting the total minimum due from the total payments made across all of a consumer’s credit cards.
Both variables “performed quite well as a risk splitter across credit products, even when controlling for traditional credit score,” Becker says.
Two consumers with a TPR of 2.0 “could have much different AEP profiles” that reflect a more nuanced analysis of behavior. For instance, a consumer making $2,000 in payments with a total minimum due of $1,000 would have a TPR of 2.0 and an AEP of $1,000. A consumer making $200 in payments when the total minimum due was $100 also would have a TPR of 2.0, but their AEP would only be $100.
“Having more than one metric to understand payment behavior,” Becker says, provides additional flexibility to lenders and servicers who strive to better understand a customer’s ability to pay,
