Why are clients' credit scores dropping?

Credit reporting company TransUnion has just released a report with a dull title “Score Migration Impact to the Credit Ecosystem,” but some interesting observations – it appears that we are seeing a nationwide drop in credit scores.

The study reveals that although clients’ credit scores experienced a significant boost during the initial stages of the COVID-19 pandemic, thanks to government assistance programs, reduced credit usage, and forbearance options for loan payments, some of those consumers who transitioned to higher credit score ranges are now facing higher delinquency rates compared to historical data for those risk tiers.

The rise in credit scores can be attributed to two key factors. Firstly, individuals benefited from lower credit balances and utilization due to reduced spending during the lockdown and surplus funds provided by government assistance. Secondly, lower delinquencies were observed as a result of payment forbearance programs and increased liquidity, allowing consumers to stay current on their payments.

During the pandemic, with many activities and travel plans put on hold, consumers utilized their savings, along with additional relief funds from the government, to pay off their credit balances. This led to decreased balances, making it easier for consumers to stay up to date with their payments and resulting in lower delinquency rates. Consequently, credit scores improved, granting individuals greater access to credit.

Median credit scores experienced a significant surge during the pandemic and have remained elevated since then. However, as government assistance programs came to an end and inflation started to rise in mid-2021, consumer demand for credit increased. Products such as credit cards and personal loans, which offer immediate liquidity, saw particularly high demand. Lenders also became more willing to provide these credit products, leading to a 58.8% increase in credit card originations and a 54.3% increase in unsecured personal loan originations in 2022 compared to the previous year.

The study also highlighted a concerning trend among borrowers who had recently transitioned to a higher credit risk range. Many of these borrowers began reverting to their previous credit behaviors, resulting in delinquency rates similar to those with lower credit scores prior to the pandemic. For instance, the delinquency rate of a sub-segment of new unsecured personal loan borrowers in Q3 2021, who had recently migrated to a higher credit score, resembled the delinquency rates of borrowers with credit scores 25 points lower before the pandemic.

Michele Raneri, the vice president and head of US research and consulting at TransUnion, emphasized the importance of lenders taking a comprehensive approach to assessing credit score migrators. By analyzing additional trended credit behaviors, lenders can better identify borrowers who are likely to maintain their improved credit positions and those who may perform more in line with their prior score levels.

Raneri stated: “Credit scores continue to perform extremely well at their intended role of rank ordering borrower risk. That said, the temporary benefits brought on by pandemic-era government relief programs, and resulting consumer credit behaviors during that time, led to a rise in scores for many consumers, particularly those who previously had lower scores due to delinquent accounts and/or high credit utilization.”

So what effect did a rising tide of credit scores have? 

While clients might have been pleased to see their numbers climb, as the saying goes, “a rising tide floats all boats” and a universal hike in credit scores means that, well, that increased score just ain’t what it used to be.

 TransUnion’s figures show that a 625 post pandemic is ‘worth’ a pre-pandemic 600 for bankcard and UPL. 

Looking at auto? 610 now is ‘worth’ a pre-COVID 600.