New research into consumer payment behavior promises to enhance credit scores and enable even more precise risk-based pricing, executives with a major credit scoring firm and credit unions say.
TransUnion one of the three major national credit bureaus, started by looking more closely into one of the large gaps in the credit card world, the gulf between “transactors” – those who pay off their entire credit card balance each cycle – and “revolvers” who only pay off part of the balance. Then the analytic firm set out to discover the other ways that those who make higher payments treat their other loans and to quantify that impact.
“TransUnion’s study has confirmed the conventional wisdom that transactors—those consumers who pay off their entire balance each month—are better risks than revolvers, i.e., consumers who only pay a portion of their balance, and moreover has quantified just how big an increase in risk revolvers represent,” said Ezra Becker, co-author of the study and vice president of research and consulting in TransUnion’s financial services business unit.
“Just as importantly, the study revealed that not all revolvers are 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 type,” Becker said.
“Our findings are good news for consumers, particularly those who only pay off portions of their credit cards each month. Even if they can’t pay the full balance, they may now find that lenders view them in a more positive light depending on the amount they do pay,” he said.
The firm discovered that of consumers making payments on their credit cards, 40% will pay their entire balance while 60% will pay somewhat less. Of those 60%, 20% will pay only their card minimum.
TransUnion also came up with a new data point, the Total Payment Ratio, which is found by dividing a consumer's total monthly credit card payment by the total minimum due on their cards. Thus, a consumer who makes $1,200 in card payments on cards on which he had minimum payments of $600 would have a TPR of 2.0.
The firm also found that cardholders who routinely pay only their card minimums are two and three times as risky as those pay more, even if only slightly more.
This information should help credit unions better understand their risk and better tailor their loan pricing, explained Fred Ryerse, senior vice president of lending for the $2.4 billion Members 1st Federal Credit Union in Mechanicsburg, Pa.
Ryerse noted, for example, that this development will enable his credit union to better understand some of the nuances in credit scoring. For example, an auto loan applicant with a credit score of 700 but with a history of making only minimum payments on cards might receive a lower credit limit or pay a somewhat higher interest rate than an auto loan applicant with a base credit score of 690 but a TPR of 2.0.
The same data could also be used as an early warning should a member begin to get into trouble financially, Ryerse observed.
For example, a member who had long had a TPR of 1.3 and who had fallen to making only minimum payments might get a call to see what might have happened and whether the credit union could help overcome some difficulty.