Todd Hoover is senior vice president, marketing practice for Equifax and he leads a consulting team that enables clients to build best-in-class, data-driven marketing capabilities and programs. For more information, visit www.equifax.com.
Between government stimulus checks, loan accommodations and fewer opportunities to spend on discretionary items like vacations and travel because of pandemic restrictions, the overall credit positions for millions of Americans over the past two years have strengthened.
Surveys from the New York Federal Reserve1 indicate that as the economy rebounded from the initial shock of the pandemic, U.S. consumers showed a stronger demand for credit. The surveys also show that applications for credit in 2021 rebounded to pre-pandemic 2019 levels.
This rebound was broad-based across credit score bands and age groups. However, the Consumer Expectations Credit Access Survey1 data indicates that the demand was strongest for consumers with less than prime credit scores and consumers younger than age 40 or above age 60.
No doubt, since the pandemic, credit behaviors and patterns have changed. According to a February 2021 Associated Press-NORC Center for Public Affairs Research poll, 68% of respondents said they were able to pay down debt or save more after the onset of the pandemic. This strengthened consumer spending power and surprised policymakers given the severity of the pandemic’s early impact on the global economy.
This shift in consumer behavior is quite a change for lenders. In fact, the CEO of America’s second-largest bank recently said consumers are spending “at a faster rate” than he’s ever seen, although he remains concerned about how inflation and supply-chain issues will influence the economy going into the winter2.
And for those traditionally in the less-than-prime credit standing, the influx of Government stimulus boosted their ability to make purchases and apply for loans they may not have qualified for before the pandemic.
While lower credit scores may have previously equaled risk for auto dealers, with these new economic conditions and consumer behaviors, lenders now need more holistic data insights to better gauge a consumer’s ability to pay back a loan.
How to Gauge Today’s More Complex Consumer Financial Picture
With the positive effects of stimulus packages, how can lenders get a true financial picture of a prospective borrower? The pandemic has made it more difficult than ever for a lender to look at two people with the same credit score and accurately assess risk and truly understand who has the financial ability to pay down their loan.
While some consumers have thrived, others are challenged by rising inflation, job changes and overextended finances. For marketers and risk managers, these opposing financial situations present increased challenges in planning for acquisition and account management efforts. The ability to differentiate which consumers are likely to be able to meet current and future financial commitments, from those who will not be able to meet those obligations is a must as the automotive industry emerges from the pandemic.
While credit reports remain a strong indicator of credit history and past financial reliability, Fair Credit Reporting Act (FCRA) compliant information that is not included in traditional credit report data, has the potential to help responsibly expand consumer access to credit opportunity and support a more inclusive economy.
Why Should Lenders Consider Financial Durability in Addition to Credit Reports?
Lenders can use financial durability to obtain a robust view of a consumer’s financial resilience — meaning how likely a household is able to keep spending and meet current and future financial obligations. Financial durability can help marketing and risk managers to develop consumer strategies to differentiate consumers for acquisition efforts, inform pre-collections and assist with treatment prioritization for delinquent accounts.
What Does Financial Durability Analyze?
Financial Durability modeling provides an indicator of financial resilience by analyzing the intersection of multiple financial capacity measures:
- Affluence — based on a foundation of anonymous , aggregated invested assets
- Estimated total household income — based on income from wages, assets, business, and retirement funds
- Spending power — discretionary funds available to spend, save, or invest, after accounting for fixed expenses of life
- Aggregated credit — such as credit utilization and delinquencies
The visibility provided by financial durability helps lenders enhance multi-channel acquisition targeting with expanded prescreen and pay-over-time audiences by identifying consumers with modest, low, or no credit scores, but high durability.
It can also deepen customer relationships and identify high-durability accounts for offers such as credit line increases, balance transfer and debt consolidation.
Lastly, financial durability insight can inform account / portfolio management and prioritize collections so that risk managers can better segment accounts by likelihood of delinquency and for pre-collections account treatment strategies. This helps to prioritize high-durability households for focused retention, rank order accounts in collections by durability to increase recovery, and to better understand risk of credit and pay-over-time portfolios.
With stronger visibility into consumers’ financial durability in this post-COVID era, lenders, risk managers and marketers can make more informed decisions on how to manage their customer portfolios, better manage risk, and drive smarter revenue.
Appendix
2: https://abcnews.go.com/Business/wireStory/bofa-ceo-consumers-spending-fastest-pace-81719161
3: https://www.cnbc.com/2015/05/05/credit-invisible-26-million-have-no-credit-score.html
