TransUnion Study Finds Millions Of New-To-Credit Consumers Are Similar, If Not Better, Risks Than Established Credit Users
New-to-credit consumers – those early in their credit journeys – generally perform as well or better than borrowers with established credit and similar risk scores. This finding from a newly released TransUnion (NYSE: TRU) global study, “Empowering Credit Inclusion: A Deeper Perspective on New-to-Credit Consumers,” may give some assurance to lenders in both developed and developing credit markets that they can extend additional credit products to such consumers without incurring materially higher delinquencies.
The study included data and insights about millions of consumers in varied global markets, including the United States, Brazil, Canada, Colombia, Dominican Republic, Hong Kong, India, Philippines and South Africa. TransUnion defined a new-to-credit consumer as one with no prior credit history on their credit bureau file who opened their first-ever, traditional credit product such as an auto loan, credit card or another loan unique to individual regions. The study then examined the behaviors and performance of those new-to-credit consumers over the subsequent two years after opening their first credit product.
“A particular focus around the topic of financial inclusion is credit inclusion — the ability of consumers to access traditional lending products, such as credit cards, mortgages and personal loans. These products serve as a means to financial mobility for consumers and can be a gateway to a better quality of life, enabling homeownership, business formation and wealth creation,” said Charlie Wise, co-author of the study and head of global research at TransUnion. “The more consumers who can participate in credit markets in a region, the greater the opportunities for broad economic inclusion. The data from our study demonstrate that new-to-credit consumers are often good risks who are hungry for credit and will show loyalty to those financial institutions that offer them their first credit accounts.”
In the United States, 5.8 million consumers opened their first credit product and became new-to-credit (NTC) during 2021. And another 3.0 million became NTC through the first half of 2022. In 2021, Gen Z made up the largest part of this group with 59%, followed by Millennials (21%), Gen X (12%) and Baby Boomers (7%). One of the main takeaways from the study: NTC consumers around the globe are generally good risks when compared to other established borrowers with similar credit risk profiles. As well, credit cards are generally the first credit product opened by most NTC borrowers in the U.S. as well as many of the other regions studied.
To better understand credit performance, the study looked at NTC consumers who opened credit cards as a subsequent product over their initial two year journey and the delinquency performance after six months on those cards. It then compared them to the delinquency rate of credit-served consumers who also opened cards in the same time period. The study found in the near prime and prime score bands — the score ranges where many NTC consumers fall early in their credit journeys — the delinquency rate for NTC consumers was comparable to, or even better than, more established credit-served consumers. This trend was seen in both pre-pandemic and pandemic periods.
In nearly every region, depending on risk tier or time period of origination, instances occurred in which NTC borrowers had lower delinquency rates on newly-opened credit cards than established borrowers. In the U.S., on subsequent credit card originations after opening their first account, NTC consumers had slightly higher delinquency rates than credit-served consumers in the same near prime and prime score ranges, though the differences are small enough to make the NTC segment a potentially attractive segment for lenders looking for profitable growth.
In the U.S., when observing performance on the initial credit cards that consumers opened as their first product, NTC consumers with credit scores in the near prime tier had lower delinquency rates than credit-served consumers with the same age and risk profiles. This finding was observed in many of the other regions as well. This is an indication that many NTC consumers are careful to make timely payments on their first-ever credit cards in order to preserve ongoing access to this new source of credit.
Better understanding NTC borrower tendencies
TransUnion also undertook a survey-based market research study to understand the voice of NTC consumers, which included responses from 8,465 NTC consumers from a range of markets, including Brazil, Canada, Colombia, Dominican Republic, India, Philippines, South Africa and the U.S.
The study found that new expenses were the primary driver for opening a first lending product in nearly all markets, excluding the U.S. and Canada, where having access to a convenient means of spending was the top motivator. This is supported by the choice of first product types, where in the U.S. and Canada the most common first product opened is a credit card.
A majority of NTC consumers across all regions, with the exception of India, reported receiving a credit product at the first institution where they applied — without needing to go to multiple lenders. In the U.S., 54% of NTC borrowers reported receiving a credit product from the first institution where they applied.
The study also found that convenience is key for NTC borrowers and may portend more opportunities for lenders in the future. In selecting which institution to open their first product with, convenience was cited as the top criterion in all regions except for Brazil. In the U.S., 33% of Americans cited convenience as their top factor. Lenders providing an NTC borrower with their first account also may benefit by building loyal customers. In the U.S., 57% of all NTC consumers who opened a personal loan as a subsequent origination within two years after opening their first trade, did so with the lender of their first account.
Finally, the study found that on average, about six in 10 NTC consumers said their need for credit will increase in the next three to five years, with the highest levels in developing markets (led by India at 79%). Approximately 52% of American NTC consumers stated their need for credit will rise in this same timeframe.
“It’s clear that new-to-credit borrowers around the globe and in the United States will play a large role in the growth of many lenders’ books of business,” said Michele Raneri, co-author of the study and head of U.S. research at TransUnion. “Banks, credit unions and other financial institutions who use alternative data while providing products, channels and a positive onboarding process, will likely be the ones who succeed in building loyalty with this segment of the population.”
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